{"id":55,"date":"2019-09-23T19:41:50","date_gmt":"2019-09-23T19:41:50","guid":{"rendered":"https:\/\/pressbooks.usnh.edu\/ld823\/chapter\/14\/"},"modified":"2023-03-24T15:12:28","modified_gmt":"2023-03-24T15:12:28","slug":"14","status":"publish","type":"chapter","link":"https:\/\/pressbooks.usnh.edu\/ld823\/chapter\/14\/","title":{"raw":"Corporate-Level Strategies","rendered":"Corporate-Level Strategies"},"content":{"raw":"Concentration Strategies<\/strong>\n\nFor many firms, concentration strategies are very sensible. These strategies involve trying to compete successfully only within a single industry. McDonald\u2019s, Starbucks, and Subway are three firms that have relied heavily on concentration strategies to become dominant players.\n\n\n\n\n\n
Market penetration<\/strong> involves trying to gain additional share of a firm\u2019s existing markets using existing products\u2014often by relying on extensive advertising. Perhaps the most famous example of two close rivals simultaneously attempting market penetration is the \u201ccola wars\u201d where Coca-Cola and PepsiCo fight for share in the soft drink market. Pepsi\u2019s blind taste tests in 1975 called the Pepsi Challenge is one of the more famous attacks in this ongoing battle.<\/td>\n<\/tr>\n
Market development<\/strong> involves taking existing products and trying to sell them within new markets. Starbucks engages in market development by selling their beans and bottled drinks in grocery stores. Apple engages in market development by allowing customers in Starbucks stores to connect directly to iTunes store and Starbucks Now Playing content. Customers are offered a free download to get them to visit iTunes\u2014and to perhaps purchase more songs.<\/td>\n<\/tr>\n
Product development<\/strong> involves creating new products to serve existing markets. King Gillette, an American businessman whose family hailed from France, pioneered the safety razor that bears his family name. His company\u2019s more recent innovations in the razor market include Trac II (the first two-bald razor), Altra (first razor with a pivoting head), Sensor (first razor with spring-loaded blades), Mach 3 (first three-blade razor), and Fusion (first six-blade razor). Is the ten-blade razor coming soon?<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nTable 1 Concentration Strategies. Concentration strategies involve trying to grow by successfully competing only within a single industry. We illustrate the three concentration strategies in table 1.<\/em>\n\nMarket Penetration<\/strong>\n\nThere are three concentration strategies: (1) market penetration, (2) market development, and (3) product development. A firm can use one, two, or all three as part of their efforts to excel within an industry (Ansoff, 1957). Market penetration involves trying to gain additional share of a firm\u2019s existing markets using existing products. Often firms will rely on advertising to attract new customers with existing markets.\n\nNike, for example, features famous athletes in print and television ads designed to take market share within the athletic shoes business from Adidas and other rivals. McDonald\u2019s has pursued market penetration in recent years by using Latino themes within some of its advertising. The firm also maintains a Spanish-language website at http:\/\/www.meencanta.com<\/a>; the website\u2019s name is the Spanish translation of McDonald\u2019s slogan \u201cI\u2019m lovin\u2019 it.\u201d McDonald\u2019s hopes to gain more Latino customers through initiatives such as this website.\n\nMarket Development<\/strong>\n\nMarket development involves taking existing products and trying to sell them within new markets. One way to reach a new market is to enter a new retail channel. Starbucks, for example, has stepped beyond selling coffee beans only in its stores and now sells beans in grocery stores. This enables Starbucks to reach consumers that do not visit its coffeehouses.\n\nEntering new geographic areas is another way to pursue market development. Philadelphia-based Tasty Baking Company has sold its Tastykake snack cakes since 1914 within Pennsylvania and adjoining states. The firm\u2019s products have become something of a cult hit among customers, who view the products as much tastier than the snack cakes offered by rivals such as Hostess and Little Debbie. In April 2011, Tastykake was purchased by Flowers Foods, a bakery firm based in Georgia. When it made this acquisition, Flower Foods announced its intention to begin extensively distributing Tastykake\u2019s products within the southeastern United States. Displaced Pennsylvanians in the south rejoiced.\n\nProduct Development<\/strong>\n\nProduct development involves creating new products to serve existing markets. In the 1940s, for example, Disney expanded its offerings within the film business by going beyond cartoons and creating movies featuring real actors. More recently, McDonald\u2019s has gradually moved more and more of its menu toward healthy items to appeal to customers who are concerned about nutrition.\n\nIn 2009, Starbucks introduced VIA, an instant coffee variety that executives hoped would appeal to their customers when they do not have easy access to a Starbucks store or a coffeepot. The soft drink industry is a frequent location of product development efforts. Coca-Cola and Pepsi regularly introduce new varieties\u2014such as Coke Zero and Pepsi Cherry Vanilla\u2014in an attempt to take market share from each other and from their smaller rivals.\n\nSeattle-based Jones Soda Co. takes a novel approach to product development. Each winter, the firm introduces a holiday-themed set of unusual flavors. Jones Soda\u2019s 2006 set focus on the flavors of Thanksgiving. It contained Green Pea, Sweet Potato, Dinner Roll, Turkey and Gravy, and Antacid sodas. The flavors of Christmas were the focus of 2007\u2019s set, which included Sugar Plum, Christmas Tree, Egg Nog, and Christmas Ham. In early 2011, Jones Soda let it customers choose the winter 2011 flavors via a poll on its website. The winners were Candy Cane, Gingerbread, Pear Tree, and Egg Nog. None of these holiday flavors are expected to be big hits, of course. The hope is that the buzz that surrounds the unusual flavors each year will grab customers\u2019 attention and get them to try\u2014and become hooked on\u2014Jones Soda\u2019s more traditional flavors.\n\nHorizontal Integration: Mergers and Acquisitions<\/strong>\n\n\n\n\n\n\n\n
ExxonMobil is a direct descendant of John D. Rockefeller\u2019s Standard Oil Company. It was formed by the 1999 merger of Exxon and Mobil. As in many mergers, the new company name combines the old company names.<\/td>\n<\/tr>\n
Starbucks acquired competitor Seattle\u2019s Best Coffee\u2014which had a presence in Borders Bookstores and Subway Restaurants\u2014in order to target a more working-class audience without diluting the Starbucks brand.<\/td>\n<\/tr>\n
Bill Hewlett and Dave Packard formed Hewlett-Packard in a garage after graduating from Stanford in 1935. In recent years, HP has pursued horizontal integration through a merger with Compaq and the acquisition of Palm.<\/td>\n<\/tr>\n
DaimlerChrysler was formed in 1998 when Chrysler entered into what was billed as a \u201cmerger of equals\u201d with Germany\u2019s Daimler-Benz AG. The marriage failed, and Chrysler is currently owned by Italian automaker Fiat.<\/td>\n<\/tr>\n
Global pharmaceutical firm GlaxoSmithKline plc was formed by the merger of GlaxoWellcome plc and SmithKline Beecham plc in 200.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nTable 2 Horizontal Integration. Horizontal integrations refers to pursuing a concentration strategy by acquiring or merging with a rival. The term merger<\/strong> is generally used when two similarly sized firms are integrated into a single entity. In an acquisition, a larger firm purchases and absorbs a smaller firm.\n<\/em>\n\nAt times, firms try to expand their presence in an industry by acquiring or merging with one of their rivals. This strategic move is known as horizontal integration. An acquisition takes place when one company purchases another company. Generally, the acquired company is smaller than the firm that purchases it. A merger joins two companies into one. Mergers typically involve similarly sized companies. Disney was much bigger than Miramax and Pixar when it joined with these firms in 1993 and 2006, respectively, thus these two horizontal integration moves are considered to be acquisitions.\n\nHorizontal integration can be attractive for several reasons. In many cases, horizontal integration is aimed at lowering costs by achieving greater economies of scale. This was the reasoning behind several mergers of large oil companies, including BP and Amoco in 1998, Exxon and Mobil in 1999, and Chevron and Texaco in 2001. Oil exploration and refining is expensive. Executives in charge of each of these six corporations believed that greater efficiency could be achieved by combining forces with a former rival. Considering horizontal integration alongside Porter\u2019s five forces model highlights that such moves also reduce the intensity of rivalry in an industry and thereby make the industry more profitable.\n\nSome purchased firms are attractive because they own strategic resources such as valuable brand names. Acquiring Tasty Baking was appealing to Flowers Foods, because the name Tastykake is well known for quality in heavily populated areas of the northeastern United States.\n\nSome purchased firms have market share that is attractive. Part of the motivation behind Southwest Airlines\u2019 purchase of AirTran was that AirTran had a significant share of the airline business in cities\u2014especially Atlanta, home of the world\u2019s busiest airport\u2014that Southwest had not yet entered. Rather than build a presence from nothing in Atlanta, Southwest executives believed that buying a position was prudent.\n\nHorizontal integration may provide access to new distribution channels. Some observers were puzzled when Zuffa, the parent company of the Ultimate Fighting Championship (UFC), purchased rival mixed martial arts (MMA) promotion Strikeforce. UFC had such a dominant position within MMA that Strikeforce seemed to add very little for Zuffa. Unlike UFC, Strikeforce had gained exposure on network television through broadcasts on CBS and its partner Showtime. Thus acquiring Strikeforce might help Zuffa gain mainstream exposure of its product (Wagenheim, 2011).\n\nDespite the potential benefits of mergers and acquisitions, their financial results often are very disappointing. One study found that more than 60 percent of mergers and acquisitions erode shareholder wealth while fewer than one in six increases shareholder wealth (Henry, 2002). Some of these moves struggle because the cultures of the two companies cannot be meshed. This chapter\u2019s opening vignette suggests that Disney and Pixar may be experiencing this problem. Other acquisitions fail because the buyer pays more for a target company than that company is worth and the buyer never earns back the premium it paid.\n\nIn the end, between 30 percent and 45 percent of mergers and acquisitions are undone, often at huge losses (Hitt, et. al., 2001). For example, Mattel purchased The Learning Company in 1999 for $3.6 billion and sold it a year later for $430 million\u201412 percent of the original purchase price. Similarly, Daimler-Benz bought Chrysler in 1998 for $37 billion. When the acquisition was undone in 2007, Daimler recouped only $1.5 billion worth of value\u2014a mere 4 percent of what it paid. Thus executives need to be cautious when considering using horizontal integration.\n\nVertical Integration Strategies<\/strong>\n\nWhen pursuing a vertical integration strategy, a firm gets involved in new portions of the value chain. This approach can be very attractive when a firm\u2019s suppliers or buyers have too much power over the firm and are becoming increasingly profitable at the firm\u2019s expense. By entering the domain of a supplier or a buyer, executives can reduce or eliminate the leverage that the supplier or buyer has over the firm. Considering vertical integration alongside Porter\u2019s five forces model highlights that such moves can create greater profit potential. Firms can pursue vertical integration on their own, such as when Apple opened stores bearing its brand, or through a merger or acquisition, such as when eBay purchased PayPal.\n\nIn the late 1800s, Carnegie Steel Company was a pioneer in the use of vertical integration. The firm controlled the iron mines that provided the key ingredient in steel, the coal mines that provided the fuel for steelmaking, the railroads that transported raw material to steel mills, and the steel mills themselves. Having control over all elements of the production process ensured the stability and quality of key inputs. By using vertical integration, Carnegie Steel achieved levels of efficiency never before seen in the steel industry.\n\n\n\n\n\n\n\n
Backward vertical integration<\/strong> \u2014 entering a supplier\u2019s business\u2014is evident as all clothing design is done in-house\u2014often using employees as models.<\/td>\n<\/tr>\n
Manufacturing is conducted in a 800,000 square foot factory in downtown Los Angeles.<\/td>\n<\/tr>\n
Ironically, it was a Canadian named Dov Charney who founded American Apparel in 1989.<\/td>\n<\/tr>\n
The vertical integration process allows the company to keep pace with the fast-moving world of fashion. It takes just a couple of weeks to go from idea to retail floor.<\/td>\n<\/tr>\n
American Apparel uses forward vertical integration<\/strong>\u2014entering a buyer\u2019s business\u2014by operating 250 plus company-owned stores worldwide.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nTable 3 Vertical Integration at American Apparel When using vertical integration, firms get involved in different elements of the value chain. This concept gets top billing at American Apparel, a firm that describes its business model as \u201cvertically integrated manufacturing.\u201d The elements of their integrated process for designing, manufacturing, wholesaling, and selling basic T-shirts, underwear, leggings, dresses, and other clothing and accessories for men, women, children, and dogs is illustrated below.<\/em>\n\nToday, oil companies are among the most vertically integrated firms. Firms such as ExxonMobil and ConocoPhillips can be involved in all stages of the value chain, including crude oil exploration, drilling for oil, shipping oil to refineries, refining crude oil into products such as gasoline, distributing fuel to gas stations, and operating gas stations.\n\nThe risk of not being vertically integrated is illustrated by the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Although the US government held BP responsible for the disaster, BP cast at least some of the blame on drilling rig owner Transocean and two other suppliers: Halliburton Energy Services (which created the cement casing for the rig on the ocean floor) and Cameron International Corporation (which had sold Transocean blowout prevention equipment that failed to prevent the disaster). In April 2011, BP sued these three firms for what it viewed as their roles in the oil spill.\n\nVertical integration also creates risks. Venturing into new portions of the value chain can take a firm into very different businesses. A lumberyard that started building houses, for example, would find that the skills it developed in the lumber business have very limited value to home construction. Such a firm would be better off selling lumber to contractors.\n\nVertical integration can also create complacency. Consider, for example, a situation in which an aluminum company is purchased by a can company. People within the aluminum company may believe that they do not need to worry about doing a good job because the can company is guaranteed to use their products. Some companies try to avoid this problem by forcing their subsidiary to compete with outside suppliers, but this undermines the reason for purchasing the subsidiary in the first place.\n\nBackward Vertical Integration<\/strong>\n\nA backward vertical integration strategy involves a firm moving back along the value chain and entering a supplier\u2019s business. Some firms use this strategy when executives are concerned that a supplier has too much power over their firms. In the early days of the automobile business, Ford Motor Company created subsidiaries that provided key inputs to vehicles such as rubber, glass, and metal. This approach ensured that Ford would not be hurt by suppliers holding out for higher prices or providing materials of inferior quality.\n\nAlthough backward vertical integration is usually discussed within the context of manufacturing businesses, such as steelmaking and the auto industry, this strategy is also available to firms such as Disney that compete within the entertainment sector. ESPN is a key element of Disney\u2019s operations within the television business. Rather than depend on outside production companies to provide talk shows and movies centered on sports, ESPN created its own production company. ESPN Films is a subsidiary of ESPN that was created in 2001. ESPN Films has created many of ESPN\u2019s best-known programs, including Around the Horn<\/em> and Pardon the Interruption<\/em>. By owning its own production company, ESPN can ensure that it has a steady flow of programs that meet its needs.\n\nForward Vertical Integration<\/strong>\n\nA forward vertical integration strategy involves a firm moving further down the value chain to enter a buyer\u2019s business. Disney has pursued forward vertical integration by operating more than three hundred retail stores that sell merchandise based on Disney\u2019s characters and movies. This allows Disney to capture profits that would otherwise be enjoyed by another store. Each time a Hannah Montana book bag is sold through a Disney store, the firm makes a little more profit than it would if the same book bag were sold by a retailer such as Target.\n\nForward vertical integration also can be useful for neutralizing the effect of powerful buyers. Rental car agencies are able to insist on low prices for the vehicles they buy from automakers because they purchase thousands of cars. If one automaker stubbornly tries to charge high prices, a rental car agency can simply buy cars from a more accommodating automaker. It is perhaps not surprising that Ford purchased Hertz Corporation, the world\u2019s biggest rental car agency, in 1994. This ensured that Hertz would not drive too hard of a bargain when buying Ford vehicles. By 2005, selling vehicles to rental car companies had become less important to Ford and Ford was struggling financially. The firm then reversed its forward vertical integration strategy by selling Hertz.\n\neBay\u2019s purchase of PayPal and Apple\u2019s creation of Apple Stores are two recent examples of forward vertical integration. Despite its enormous success, one concern for eBay is that many individuals avoid eBay because they are nervous about buying and selling goods online with strangers. PayPal addressed this problem by serving, in exchange for a fee, as an intermediary between online buyers and sellers. eBay\u2019s acquisition of PayPal signaled to potential customers that their online transactions were completely safe\u2014eBay was now not only the place where business took place but eBay also protected buyers and sellers from being ripped off.\n\nApple\u2019s ownership of its own branded stores set the firm apart from computer makers such as Hewlett-Packard, Acer, and Gateway that only distribute their products through retailers like Best Buy and Office Depot. Employees at Best Buy and Office Depot are likely to know just a little bit about each of the various brands their store carries.\n\nIn contrast, Apple\u2019s stores are popular in part because store employees are experts about Apple products. They can therefore provide customers with accurate and insightful advice about purchases and repairs. This is an important advantage that has been created through forward vertical integration.\n\nDiversification Strategies<\/strong>\n\nFirms using diversification strategies enter entirely new industries. While vertical integration involves a firm moving into a new part of a value chain that it is already is within, diversification requires moving into new value chains. Many firms accomplish this through a merger or an acquisition, while others expand into new industries without the involvement of another firm.\n\nThree Tests for Diversification<\/strong>\n\nA proposed diversification move should pass three tests or it should be rejected (Porter, 1987).\n
    \n \t
  1. How attractive is the industry that a firm is considering entering? Unless the industry has strong profit potential, entering it may be very risky.<\/li>\n \t
  2. How much will it cost to enter the industry? Executives need to be sure that their firm can recoup the expenses that it absorbs in order to diversify. When Philip Morris bought 7Up in the late 1970s, it paid four times what 7Up was actually worth. Making up these costs proved to be impossible and 7Up was sold in 1986.<\/li>\n \t
  3. Will the new unit and the firm be better off? Unless one side or the other gains a competitive advantage, diversification should be avoided. In the case of Philip Morris and 7Up, for example, neither side benefited significantly from joining together.<\/li>\n<\/ol>\nRelated Diversification<\/strong>\n\nRelated diversification occurs when a firm moves into a new industry that has important similarities with the firm\u2019s existing industry or industries. Because films and television are both aspects of entertainment, Disney\u2019s purchase of ABC is an example of related diversification. Some firms that engage in related diversification aim to develop and exploit a core competency to become more successful. A core competency is a skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business (Prahalad & Hamel, 1990). For example, Newell Rubbermaid is skilled at identifying underperforming brands and integrating them into their three business groups: (1) home and family, (2) office products, and (3) tools, hardware, and commercial products.\n\nHonda Motor Company provides a good example of leveraging a core competency through related diversification. Honda is best known for its cars and trucks but the company started in the motorcycle business. Through competing in the motorcycle business, Honda developed a unique ability to build small and reliable engines. When executives decided to diversify into the automobile industry, Honda was successful in part because it leveraged this ability within its new business.\n\nSometimes the benefits of related diversification that executives hope to enjoy are never achieved. Both soft drinks and cigarettes are products that consumers do not need. Companies must convince consumers to buy these products through marketing activities such as branding and advertising. Thus, on the surface, the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to take its existing marketing skills and apply them within a new industry. Unfortunately, the possible benefits to 7Up never materialized.\n\nUnrelated Diversification<\/strong>\n\n\n\n\n\n
    Berkshire\u2019s insurance group includes firms such as General Re and GEICO. They maintain capital strength at exceptionally high levels, which gives them an advantage even a cave man could understand.<\/td>\nBerkshire\u2019s financial health is also fueled by utilities and energy companies that are part of the MidAmerican Energy Holdings Company.<\/td>\nTheir apparel businesses include well-known names such as Fruit of the Loom and Justin Brands.<\/td>\n<\/tr>\n
    Building companies include Acme Building Brands, makes of the famous brick, as well as paint company Benjamin Moore & Co.<\/td>\nFlightSafety International Inc. is a Berkshire firm that engages in high-tech training to aircraft and ship operators.<\/td>\nRetail holdings include a number of furniture businesses such as R.C. Willey Home Furnishings, Star Furniture Company, and Jordan\u2019s Furniture, Inc.<\/td>\n<\/tr>\n
    Hungry for more businesses to manage, Berkshire acquired The Pampered Chef, Ltd.\u2014the largest direct kitchen tools seller\u2014in 2002.<\/td>\nBuffett had a sweet tooth for See\u2019s Candies, who he purchased from the See\u2019s family in 1972.<\/td>\nShareholders were all on board for the purchase of the Burlington Northern Santa Fe Corporation in 2009.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nTable 4 Unrelated Diversification at Berkshire Hathaway. \u201dDon\u2019t put all your eggs in one basket\u201d is often a good motto for individual investors. By building a portfolio of stocks, an investor can minimize the chances of suffering a huge loss. Some executives take a similar approach. Rather than trying to develop synergy across businesses, they seek greater financial stability for their firms by owning an array of companies. Warren Buffett\u2019s Berkshire Hathaway has long enjoyed strong performance by purchasing companies and improving how they are run. Below we illustrate some of the different groups in their very diversified portfolio of firm<\/em>s.\n\nWhy would a soft-drink company buy a movie studio? It\u2019s hard to imagine the logic behind such a move, but Coca-Cola did just this when it purchased Columbia Pictures in 1982 for $750 million. This is a good example of unrelated diversification, which occurs when a firm enters an industry that lacks any important similarities with the firm\u2019s existing industry or industries. Luckily for Coca-Cola, its investment paid off\u2014Columbia was sold to Sony for $3.4 billion just seven years later.\n\nMost unrelated diversification efforts, however, do not have happy endings. Harley-Davidson, for example, once tried to sell Harley-branded bottled water. Starbucks tried to diversify into offering Starbucks-branded furniture. Both efforts were disasters. Although Harley-Davidson and Starbucks both enjoy iconic brands, these strategic resources simply did not transfer effectively to the bottled water and furniture businesses.\n\nLighter firm Zippo is currently trying to avoid this scenario. According to CEO Geoffrey Booth, the Zippo is viewed by consumers as a \u201crugged, durable, made in America, iconic\u201d brand (Townhall, 2010). This brand has fueled eighty years of success for the firm. But the future of the lighter business is bleak. Zippo executives expect to sell about 12 million lighters this year, which is a 50 percent decline from Zippo\u2019s sales levels in the 1990s. This downward trend is likely to continue as smoking becomes less and less attractive in many countries. To save their company, Zippo executives want to diversify.\n\nZippo wants to follow a path blazed by Eddie Bauer and Victorinox Swiss Army Brands Inc. The rugged outdoors image of Eddie Bauer\u2019s clothing brand has been used effectively to sell sport utility vehicles made by Ford. The high-quality image of Swiss Army knives has been used to sell Swiss Army\u2013branded luggage and watches. As of March 2011, Zippo was examining a wide variety of markets where their brand could be leveraged, including watches, clothing, wallets, pens, liquor flasks, outdoor hand warmers, playing cards, gas grills, and cologne. Trying to figure out which of these diversification options would be winners, such as the Eddie Bauer-edition Ford Explorer, and which would be losers, such as Harley-branded bottled water, was a key challenge facing Zippo executives.\n\nStrategy at the Movies<\/strong>\n\nIn Good Company<\/span>\n\nWhat do Techline cell phones, Sports America<\/em> magazine, and Crispity Crunch cereals have in common? Not much, but that did not stop Globodyne from buying each of these companies in its quest for synergy in the 2004 movie In Good Company<\/em>. Executive Carter Duryea was excited when his employer Globodyne purchased Waterman Publishing, the owner of Sports America<\/em> magazine. The acquisition landed him a big promotion and increased his salary to \u201cPorsche-leasing\u201d size.\n\nSynergy is created when two or more businesses produce benefits together that could not be produced separately. While Duryea was confident that a cross-promotional strategy between his advertising division and the other units within the Globodyne universe was a slam-dunk, Waterman employee Dan Foreman saw little congruence between advertisements in Sports America<\/em> on the one hand and cell phones and breakfast cereals on the other. Despite his considerable efforts, Duryea was unable to increase ad pages in Sports America<\/em> because the unrelated nature of Globodyne\u2019s other business units inhibited his strategy of creating synergy. Seeing little value in owning a failing publishing company, Globodyne promptly sold the division to another conglomerate. After the sale, the executives that had been rewarded for the initial purchase of Waterman Publishing, including Duryea, were fired.\n\nGlobodyne\u2019s inability to successfully manage Waterman Publishing illustrates the difficulties associated with unrelated diversification. While buying companies outside a parent company\u2019s core competencies can increase the size of the company and in turn its executives\u2019 bank accounts, managing firms unfamiliar to management is generally a risky and losing proposition. Decades of research on strategic management suggest that when firms diversify, it is best to \u201cstick to the knitting.\u201d That is, stay with businesses executives are familiar with and avoid moving into ventures where little expertise exists.\n\nStrategies for Getting Smaller<\/strong>\n\n\u201cIn what industry or industries should our firm compete?\u201d is the central question addressed by corporate-level strategy. In some cases, the answer that executives arrive at involves exiting one or more industries.\n\nRetrenchment<\/span>\n\nIn the early twentieth century, many military battles were fought in series of parallel trenches. If an attacking army advanced enough to force a defending army to abandon a trench, the defenders would move back to the next trench and try to refortify their position. This small retreat was preferable to losing the battle entirely. Trench warfare inspired the business term retrenchment. Firms following a retrenchment strategy shrink one or more of their business units. Much like an army under attack, firms using this strategy hope to make just a small retreat rather than losing a battle for survival.\n\nRetrenchment is often accomplished through laying off employees. In July 2011, for example, South African grocery store chain Pick n Pay announced plans to release more than 3,000 of its estimated 36,000 workers. Just over a month earlier, South African officials had approved Walmart\u2019s acquisition of a leading local retailer called Massmart. Rivalry in the South African grocery business seemed likely to become fiercer, and Pick n Pay executives needed to cut costs for their firm to remain competitive.\n\nA Pick n Pay executive explained the layoffs by noting that \u201cthe decision was not taken lightly but was required to ensure the viability of the retail business and its employees into the future (Chilwane, 2011).\u201d This is a common rationale for retrenchment\u2014by shrinking the size of a firm, executives hope that the firm can survive as a profitable enterprise. Without becoming smaller and more cost effective, Pick n Pay and other firms that use retrenchment can risk total failure.\n\nRestructuring<\/strong>\n\n\n\n\n\n\n\n
    There are 17 billion of Freescale Semiconductor\u2019s chips in use around the world. The firm was spun-off from Motorola in 2004.<\/td>\n<\/tr>\n
    Toyota started in the car business, right? Wrong. The firm was spun-off in the 1930s from Toyoda Automatic Loom Works\u2014a company that produced commercial weaving looms.<\/td>\n<\/tr>\n
    The 2000 merger between America Online (AOL) and Time Warner was one of the largest in history. The firms split in 2009. Net result? A staggering $99 billion loss.<\/td>\n<\/tr>\n
    Delphi Automotive\u2014an automotive parts company headquartered in Troy, Michigan\u2014is a spin-off from General Motors.<\/td>\n<\/tr>\n
    Guidant Corporation\u2014a spin-off from Eli Lilly\u2014designs and manufacturers artificial pacemakers, defibrillators, stents, and other heart-helpful medical products.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nTable 5 Spin Offs. Spin-offs occur when businesses create a new firm from a piece of their operations. Because some diversified firms are too complex for investors to understand, breaking them up can create wealth by resulting in greater stock market valuations. Spinning off a company also reduces management layers, which can lower costs and speed up decision making. Below we describe a variety of firms that were created as spin-offs.<\/em>\n\nExecutives sometimes decide that bolder moves than retrenchment are needed for their firms to be successful in the future. Divestment refers to selling off part of a firm\u2019s operations. In some cases, divestment reverses a forward vertical integration strategy, such as when Ford sold Hertz. Divestment can also be used to reverse backward vertical integration. General Motors (GM), for example, turned a parts supplier called Delphi Automotive Systems Corporation from a GM subsidiary into an independent firm. This was done via a spin-off, which involves creating a new company whose stock is owned by investors. GM stockholders received 0.69893 shares of Delphi for every share of stock they owned in GM. A stockholder who owned 100 shares of GM received 69 shares of the new company plus a small cash payment in lieu of a fractional share.\n\nDivestment also serves as a means to undo diversification strategies. Divestment can be especially appealing to executives in charge of firms that have engaged in unrelated diversification. Investors often struggle to understand the complexity of diversified firms, and this can result in relatively poor performance by the stocks of such firms. This is known as a diversification discount. Executives sometimes attempt to unlock hidden shareholder value by breaking up diversified companies.\n\nFortune Brands provides a good example. Surprisingly, this company does not own Fortune<\/em> magazine, but it has been involved in a diverse set of industries. As of 2010, the firm consisted of three businesses: spirits (including Jim Beam and Maker\u2019s Mark), household goods (including Masterlock and Moen Faucets), and golf equipment (including Titleist clubs and balls as well as FootJoy shoes). In December 2010, Fortune Brand\u2019s CEO announced a plan to separate the three businesses to \u201cmaximize long-term value for our shareholders and to create exciting opportunities within our businesses (Sauerhaft, 2011).\u201d Fortune Brands took the first step toward overcoming the diversification discount in May 2011 when it reached an agreement to sell its gold business to Fila. In June 2011, plans to spin off the home products business were announced.\n\nExecutives are sometimes forced to admit that the operations that they want to abandon have no value. If selling off part of a business is not possible, the best option may be liquidation. This involves simply shutting down portions of a firm\u2019s operations, often at a tremendous financial loss. GM has done this by scrapping its Geo, Saturn, Oldsmobile, and Pontiac brands. Ford recently followed this approach by shutting down its Mercury brand. Such moves are painful because massive investments are written off, but becoming \u201cleaner and meaner\u201d may save a company from total ruin.\n\nPortfolio Planning and Corporate-Level Strategy<\/strong>\n\nExecutives in charge of firms involved in many different businesses must figure out how to manage such portfolios. General Electric (GE), for example, competes in a very wide variety of industries, including financial services, insurance, television, theme parks, electricity generation, lightbulbs, robotics, medical equipment, railroad locomotives, and aircraft jet engines. When leading a company such as GE, executives must decide which units to grow, which ones to shrink, and which ones to abandon.\n\nPortfolio planning can be a useful tool. Portfolio planning is a process that helps executives assess their firms\u2019 prospects for success within each of its industries, offers suggestions about what to do within each industry, and provides ideas for how to allocate resources across industries. Portfolio planning first gained widespread attention in the 1970s, and it remains a popular tool among executives today.\n\nThe Boston Consulting Group (BCG) Matrix<\/span>\n\nThe Boston Consulting Group (BCG) matrix is the best-known approach to portfolio planning. Using the matrix requires a firm\u2019s businesses to be categorized as high or low along two dimensions: its share of the market and the growth rate of its industry. High market share units within slow-growing industries are called cash cows. Because their industries have bleak prospects, profits from cash cows should not be invested back into cash cows but rather diverted to more promising businesses. Low market share units within slow-growing industries are called dogs. These units are good candidates for divestment. High market share units within fast-growing industries are called stars. These units have bright prospects and thus are good candidates for growth. Finally, low-market-share units within fast-growing industries are called question marks. Executives must decide whether to build these units into stars or to divest them.\n\nThe BCG matrix is just one portfolio planning technique. With the help of a leading consulting firm, GE developed the attractiveness-strength matrix to examine its diverse activities. This planning approach involves rating each of a firm\u2019s businesses in terms of the attractiveness of the industry and the firm\u2019s strength within the industry. Each dimension is divided into three categories, resulting in nine boxes. Each of these boxes has a set of recommendations associated with it.\n\n\n\n\n\n
    <\/td>\nHigh Relative Market Share<\/strong><\/td>\nLow Relative Market Share<\/strong><\/td>\n<\/tr>\n
    High Industry Growth Rate<\/strong><\/td>\nStars should be funded and encourage to grow.<\/td>\nQuestion marks should be resolved by executives by deciding whether to foster or sell these units.<\/td>\n<\/tr>\n
    Low Industry Growth Rate<\/strong><\/td>\nCash cows should be \u201cmilked\u201d to supply funds to more promising businesses.<\/td>\nIt sounds mean, but dogs should be sold if possible and abandoned if necessary.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nTable 6 The Boston Consulting Group (BCG) Matrix. The Boston Consulting Group (BCG) matrix is the best-known approach to portfolio planning\u2014assessing a firm\u2019s prospects for success within the industries in which it competes. The matrix categorizes businesses as high or low along two dimensions\u2014the firm\u2019s market share in each industry and the growth rate of each industry. Suggestions are then offered about how to approach each industry.<\/em>\n\nLimitations to Portfolio Planning<\/strong>\n\nAlthough portfolio planning is a useful tool, this tool has important limitations. First, portfolio planning oversimplifies the reality of competition by focusing on just two dimensions when analyzing a company\u2019s operations within an industry. Many dimensions are important to consider when making strategic decisions, not just two. Second, portfolio planning can create motivational problems among employees. For example, if workers know that their firm\u2019s executives believe in the BCG matrix and that their subsidiary is classified as a dog, then they may give up any hope for the future. Similarly, workers within cash cow units could become dismayed once they realize that the profits that they help create will be diverted to boost other areas of the firm. Third, portfolio planning does not help identify new opportunities. Because this tool only deals with existing businesses, it cannot reveal what new industries a firm should consider entering.\n\nReferences\n\nAnsoff, H. I. 1957. Strategies for diversification. Harvard Business Review<\/em>, 35<\/em>(5), 113\u2013124.\n\nChilwane, L. 2011, July 7. Pick n Pay to retrench. The New Age<\/em>. Retrieved from http:\/\/www.thenewage.co.za\/22462-1025-53-Pick_n_Pay_to_retrench<\/a>.\n\nHenry, D. 2002, October 14. Mergers: Why most big deals don\u2019t pay off. Business Week<\/em>, 60\u201370.\n\nHitt, M. A., Harrison, J. S., & Ireland, R. D. 2001. Mergers and acquisitions: A guide to creating value for stakeholders<\/em>. New York, NY: Oxford University Press.\n\nPorter, M. E. 1987. From competitive advantage to corporate strategy. Harvard Business Review<\/em>, 65<\/em>(3), 102\u2013121.\n\nPrahalad, C. K., & Hamel, G. 1990. The core competencies of the corporation. Harvard Business Review<\/em>, 86<\/em>(1), 79\u201391.\n\nSauerhaft, R. 2011, May 20. Fortune Brands to sell Titleist and FootJoy to Fila Korea. Golf.com. Retrieved from http:\/\/www.golf.com\/golf\/tours_news\/article\/0,28136,2073173,00.html#ixzz1MvXStp2b<\/a>.\n\nTownhall, http:\/\/th2010.townhall.com\/news\/us\/2011\/03\/20\/zippos_burning_ambition_lies_in_ retail_expansion<\/a>.\n
    <\/div>\n
    Wagenheim, J. 2011, March 12. UFC buys out Strikeforce in another step toward global domination. SI.com. Retrieved from http:\/\/sportsillustrated.cnn.com\/2011\/writers\/jeff_wagenheim\/03\/12\/strikeforce-purchased\/index.html.<\/div>\n\n
    \n\n    Mastering Strategic Management<\/a> by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License<\/a>, except where otherwise noted.\n
    \n\n
    \n\n<\/div>\n \n\n \n\n \n\n \n\n ","rendered":"

    Concentration Strategies<\/strong><\/p>\n

    For many firms, concentration strategies are very sensible. These strategies involve trying to compete successfully only within a single industry. McDonald\u2019s, Starbucks, and Subway are three firms that have relied heavily on concentration strategies to become dominant players.<\/p>\n\n\n\n\n\n
    Market penetration<\/strong> involves trying to gain additional share of a firm\u2019s existing markets using existing products\u2014often by relying on extensive advertising. Perhaps the most famous example of two close rivals simultaneously attempting market penetration is the \u201ccola wars\u201d where Coca-Cola and PepsiCo fight for share in the soft drink market. Pepsi\u2019s blind taste tests in 1975 called the Pepsi Challenge is one of the more famous attacks in this ongoing battle.<\/td>\n<\/tr>\n
    Market development<\/strong> involves taking existing products and trying to sell them within new markets. Starbucks engages in market development by selling their beans and bottled drinks in grocery stores. Apple engages in market development by allowing customers in Starbucks stores to connect directly to iTunes store and Starbucks Now Playing content. Customers are offered a free download to get them to visit iTunes\u2014and to perhaps purchase more songs.<\/td>\n<\/tr>\n
    Product development<\/strong> involves creating new products to serve existing markets. King Gillette, an American businessman whose family hailed from France, pioneered the safety razor that bears his family name. His company\u2019s more recent innovations in the razor market include Trac II (the first two-bald razor), Altra (first razor with a pivoting head), Sensor (first razor with spring-loaded blades), Mach 3 (first three-blade razor), and Fusion (first six-blade razor). Is the ten-blade razor coming soon?<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Table 1 Concentration Strategies. Concentration strategies involve trying to grow by successfully competing only within a single industry. We illustrate the three concentration strategies in table 1.<\/em><\/p>\n

    Market Penetration<\/strong><\/p>\n

    There are three concentration strategies: (1) market penetration, (2) market development, and (3) product development. A firm can use one, two, or all three as part of their efforts to excel within an industry (Ansoff, 1957). Market penetration involves trying to gain additional share of a firm\u2019s existing markets using existing products. Often firms will rely on advertising to attract new customers with existing markets.<\/p>\n

    Nike, for example, features famous athletes in print and television ads designed to take market share within the athletic shoes business from Adidas and other rivals. McDonald\u2019s has pursued market penetration in recent years by using Latino themes within some of its advertising. The firm also maintains a Spanish-language website at http:\/\/www.meencanta.com<\/a>; the website\u2019s name is the Spanish translation of McDonald\u2019s slogan \u201cI\u2019m lovin\u2019 it.\u201d McDonald\u2019s hopes to gain more Latino customers through initiatives such as this website.<\/p>\n

    Market Development<\/strong><\/p>\n

    Market development involves taking existing products and trying to sell them within new markets. One way to reach a new market is to enter a new retail channel. Starbucks, for example, has stepped beyond selling coffee beans only in its stores and now sells beans in grocery stores. This enables Starbucks to reach consumers that do not visit its coffeehouses.<\/p>\n

    Entering new geographic areas is another way to pursue market development. Philadelphia-based Tasty Baking Company has sold its Tastykake snack cakes since 1914 within Pennsylvania and adjoining states. The firm\u2019s products have become something of a cult hit among customers, who view the products as much tastier than the snack cakes offered by rivals such as Hostess and Little Debbie. In April 2011, Tastykake was purchased by Flowers Foods, a bakery firm based in Georgia. When it made this acquisition, Flower Foods announced its intention to begin extensively distributing Tastykake\u2019s products within the southeastern United States. Displaced Pennsylvanians in the south rejoiced.<\/p>\n

    Product Development<\/strong><\/p>\n

    Product development involves creating new products to serve existing markets. In the 1940s, for example, Disney expanded its offerings within the film business by going beyond cartoons and creating movies featuring real actors. More recently, McDonald\u2019s has gradually moved more and more of its menu toward healthy items to appeal to customers who are concerned about nutrition.<\/p>\n

    In 2009, Starbucks introduced VIA, an instant coffee variety that executives hoped would appeal to their customers when they do not have easy access to a Starbucks store or a coffeepot. The soft drink industry is a frequent location of product development efforts. Coca-Cola and Pepsi regularly introduce new varieties\u2014such as Coke Zero and Pepsi Cherry Vanilla\u2014in an attempt to take market share from each other and from their smaller rivals.<\/p>\n

    Seattle-based Jones Soda Co. takes a novel approach to product development. Each winter, the firm introduces a holiday-themed set of unusual flavors. Jones Soda\u2019s 2006 set focus on the flavors of Thanksgiving. It contained Green Pea, Sweet Potato, Dinner Roll, Turkey and Gravy, and Antacid sodas. The flavors of Christmas were the focus of 2007\u2019s set, which included Sugar Plum, Christmas Tree, Egg Nog, and Christmas Ham. In early 2011, Jones Soda let it customers choose the winter 2011 flavors via a poll on its website. The winners were Candy Cane, Gingerbread, Pear Tree, and Egg Nog. None of these holiday flavors are expected to be big hits, of course. The hope is that the buzz that surrounds the unusual flavors each year will grab customers\u2019 attention and get them to try\u2014and become hooked on\u2014Jones Soda\u2019s more traditional flavors.<\/p>\n

    Horizontal Integration: Mergers and Acquisitions<\/strong><\/p>\n\n\n\n\n\n\n\n
    ExxonMobil is a direct descendant of John D. Rockefeller\u2019s Standard Oil Company. It was formed by the 1999 merger of Exxon and Mobil. As in many mergers, the new company name combines the old company names.<\/td>\n<\/tr>\n
    Starbucks acquired competitor Seattle\u2019s Best Coffee\u2014which had a presence in Borders Bookstores and Subway Restaurants\u2014in order to target a more working-class audience without diluting the Starbucks brand.<\/td>\n<\/tr>\n
    Bill Hewlett and Dave Packard formed Hewlett-Packard in a garage after graduating from Stanford in 1935. In recent years, HP has pursued horizontal integration through a merger with Compaq and the acquisition of Palm.<\/td>\n<\/tr>\n
    DaimlerChrysler was formed in 1998 when Chrysler entered into what was billed as a \u201cmerger of equals\u201d with Germany\u2019s Daimler-Benz AG. The marriage failed, and Chrysler is currently owned by Italian automaker Fiat.<\/td>\n<\/tr>\n
    Global pharmaceutical firm GlaxoSmithKline plc was formed by the merger of GlaxoWellcome plc and SmithKline Beecham plc in 200.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Table 2 Horizontal Integration. Horizontal integrations refers to pursuing a concentration strategy by acquiring or merging with a rival. The term merger<\/strong> is generally used when two similarly sized firms are integrated into a single entity. In an acquisition, a larger firm purchases and absorbs a smaller firm.
    \n<\/em><\/p>\n

    At times, firms try to expand their presence in an industry by acquiring or merging with one of their rivals. This strategic move is known as horizontal integration. An acquisition takes place when one company purchases another company. Generally, the acquired company is smaller than the firm that purchases it. A merger joins two companies into one. Mergers typically involve similarly sized companies. Disney was much bigger than Miramax and Pixar when it joined with these firms in 1993 and 2006, respectively, thus these two horizontal integration moves are considered to be acquisitions.<\/p>\n

    Horizontal integration can be attractive for several reasons. In many cases, horizontal integration is aimed at lowering costs by achieving greater economies of scale. This was the reasoning behind several mergers of large oil companies, including BP and Amoco in 1998, Exxon and Mobil in 1999, and Chevron and Texaco in 2001. Oil exploration and refining is expensive. Executives in charge of each of these six corporations believed that greater efficiency could be achieved by combining forces with a former rival. Considering horizontal integration alongside Porter\u2019s five forces model highlights that such moves also reduce the intensity of rivalry in an industry and thereby make the industry more profitable.<\/p>\n

    Some purchased firms are attractive because they own strategic resources such as valuable brand names. Acquiring Tasty Baking was appealing to Flowers Foods, because the name Tastykake is well known for quality in heavily populated areas of the northeastern United States.<\/p>\n

    Some purchased firms have market share that is attractive. Part of the motivation behind Southwest Airlines\u2019 purchase of AirTran was that AirTran had a significant share of the airline business in cities\u2014especially Atlanta, home of the world\u2019s busiest airport\u2014that Southwest had not yet entered. Rather than build a presence from nothing in Atlanta, Southwest executives believed that buying a position was prudent.<\/p>\n

    Horizontal integration may provide access to new distribution channels. Some observers were puzzled when Zuffa, the parent company of the Ultimate Fighting Championship (UFC), purchased rival mixed martial arts (MMA) promotion Strikeforce. UFC had such a dominant position within MMA that Strikeforce seemed to add very little for Zuffa. Unlike UFC, Strikeforce had gained exposure on network television through broadcasts on CBS and its partner Showtime. Thus acquiring Strikeforce might help Zuffa gain mainstream exposure of its product (Wagenheim, 2011).<\/p>\n

    Despite the potential benefits of mergers and acquisitions, their financial results often are very disappointing. One study found that more than 60 percent of mergers and acquisitions erode shareholder wealth while fewer than one in six increases shareholder wealth (Henry, 2002). Some of these moves struggle because the cultures of the two companies cannot be meshed. This chapter\u2019s opening vignette suggests that Disney and Pixar may be experiencing this problem. Other acquisitions fail because the buyer pays more for a target company than that company is worth and the buyer never earns back the premium it paid.<\/p>\n

    In the end, between 30 percent and 45 percent of mergers and acquisitions are undone, often at huge losses (Hitt, et. al., 2001). For example, Mattel purchased The Learning Company in 1999 for $3.6 billion and sold it a year later for $430 million\u201412 percent of the original purchase price. Similarly, Daimler-Benz bought Chrysler in 1998 for $37 billion. When the acquisition was undone in 2007, Daimler recouped only $1.5 billion worth of value\u2014a mere 4 percent of what it paid. Thus executives need to be cautious when considering using horizontal integration.<\/p>\n

    Vertical Integration Strategies<\/strong><\/p>\n

    When pursuing a vertical integration strategy, a firm gets involved in new portions of the value chain. This approach can be very attractive when a firm\u2019s suppliers or buyers have too much power over the firm and are becoming increasingly profitable at the firm\u2019s expense. By entering the domain of a supplier or a buyer, executives can reduce or eliminate the leverage that the supplier or buyer has over the firm. Considering vertical integration alongside Porter\u2019s five forces model highlights that such moves can create greater profit potential. Firms can pursue vertical integration on their own, such as when Apple opened stores bearing its brand, or through a merger or acquisition, such as when eBay purchased PayPal.<\/p>\n

    In the late 1800s, Carnegie Steel Company was a pioneer in the use of vertical integration. The firm controlled the iron mines that provided the key ingredient in steel, the coal mines that provided the fuel for steelmaking, the railroads that transported raw material to steel mills, and the steel mills themselves. Having control over all elements of the production process ensured the stability and quality of key inputs. By using vertical integration, Carnegie Steel achieved levels of efficiency never before seen in the steel industry.<\/p>\n\n\n\n\n\n\n\n
    Backward vertical integration<\/strong> \u2014 entering a supplier\u2019s business\u2014is evident as all clothing design is done in-house\u2014often using employees as models.<\/td>\n<\/tr>\n
    Manufacturing is conducted in a 800,000 square foot factory in downtown Los Angeles.<\/td>\n<\/tr>\n
    Ironically, it was a Canadian named Dov Charney who founded American Apparel in 1989.<\/td>\n<\/tr>\n
    The vertical integration process allows the company to keep pace with the fast-moving world of fashion. It takes just a couple of weeks to go from idea to retail floor.<\/td>\n<\/tr>\n
    American Apparel uses forward vertical integration<\/strong>\u2014entering a buyer\u2019s business\u2014by operating 250 plus company-owned stores worldwide.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Table 3 Vertical Integration at American Apparel When using vertical integration, firms get involved in different elements of the value chain. This concept gets top billing at American Apparel, a firm that describes its business model as \u201cvertically integrated manufacturing.\u201d The elements of their integrated process for designing, manufacturing, wholesaling, and selling basic T-shirts, underwear, leggings, dresses, and other clothing and accessories for men, women, children, and dogs is illustrated below.<\/em><\/p>\n

    Today, oil companies are among the most vertically integrated firms. Firms such as ExxonMobil and ConocoPhillips can be involved in all stages of the value chain, including crude oil exploration, drilling for oil, shipping oil to refineries, refining crude oil into products such as gasoline, distributing fuel to gas stations, and operating gas stations.<\/p>\n

    The risk of not being vertically integrated is illustrated by the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Although the US government held BP responsible for the disaster, BP cast at least some of the blame on drilling rig owner Transocean and two other suppliers: Halliburton Energy Services (which created the cement casing for the rig on the ocean floor) and Cameron International Corporation (which had sold Transocean blowout prevention equipment that failed to prevent the disaster). In April 2011, BP sued these three firms for what it viewed as their roles in the oil spill.<\/p>\n

    Vertical integration also creates risks. Venturing into new portions of the value chain can take a firm into very different businesses. A lumberyard that started building houses, for example, would find that the skills it developed in the lumber business have very limited value to home construction. Such a firm would be better off selling lumber to contractors.<\/p>\n

    Vertical integration can also create complacency. Consider, for example, a situation in which an aluminum company is purchased by a can company. People within the aluminum company may believe that they do not need to worry about doing a good job because the can company is guaranteed to use their products. Some companies try to avoid this problem by forcing their subsidiary to compete with outside suppliers, but this undermines the reason for purchasing the subsidiary in the first place.<\/p>\n

    Backward Vertical Integration<\/strong><\/p>\n

    A backward vertical integration strategy involves a firm moving back along the value chain and entering a supplier\u2019s business. Some firms use this strategy when executives are concerned that a supplier has too much power over their firms. In the early days of the automobile business, Ford Motor Company created subsidiaries that provided key inputs to vehicles such as rubber, glass, and metal. This approach ensured that Ford would not be hurt by suppliers holding out for higher prices or providing materials of inferior quality.<\/p>\n

    Although backward vertical integration is usually discussed within the context of manufacturing businesses, such as steelmaking and the auto industry, this strategy is also available to firms such as Disney that compete within the entertainment sector. ESPN is a key element of Disney\u2019s operations within the television business. Rather than depend on outside production companies to provide talk shows and movies centered on sports, ESPN created its own production company. ESPN Films is a subsidiary of ESPN that was created in 2001. ESPN Films has created many of ESPN\u2019s best-known programs, including Around the Horn<\/em> and Pardon the Interruption<\/em>. By owning its own production company, ESPN can ensure that it has a steady flow of programs that meet its needs.<\/p>\n

    Forward Vertical Integration<\/strong><\/p>\n

    A forward vertical integration strategy involves a firm moving further down the value chain to enter a buyer\u2019s business. Disney has pursued forward vertical integration by operating more than three hundred retail stores that sell merchandise based on Disney\u2019s characters and movies. This allows Disney to capture profits that would otherwise be enjoyed by another store. Each time a Hannah Montana book bag is sold through a Disney store, the firm makes a little more profit than it would if the same book bag were sold by a retailer such as Target.<\/p>\n

    Forward vertical integration also can be useful for neutralizing the effect of powerful buyers. Rental car agencies are able to insist on low prices for the vehicles they buy from automakers because they purchase thousands of cars. If one automaker stubbornly tries to charge high prices, a rental car agency can simply buy cars from a more accommodating automaker. It is perhaps not surprising that Ford purchased Hertz Corporation, the world\u2019s biggest rental car agency, in 1994. This ensured that Hertz would not drive too hard of a bargain when buying Ford vehicles. By 2005, selling vehicles to rental car companies had become less important to Ford and Ford was struggling financially. The firm then reversed its forward vertical integration strategy by selling Hertz.<\/p>\n

    eBay\u2019s purchase of PayPal and Apple\u2019s creation of Apple Stores are two recent examples of forward vertical integration. Despite its enormous success, one concern for eBay is that many individuals avoid eBay because they are nervous about buying and selling goods online with strangers. PayPal addressed this problem by serving, in exchange for a fee, as an intermediary between online buyers and sellers. eBay\u2019s acquisition of PayPal signaled to potential customers that their online transactions were completely safe\u2014eBay was now not only the place where business took place but eBay also protected buyers and sellers from being ripped off.<\/p>\n

    Apple\u2019s ownership of its own branded stores set the firm apart from computer makers such as Hewlett-Packard, Acer, and Gateway that only distribute their products through retailers like Best Buy and Office Depot. Employees at Best Buy and Office Depot are likely to know just a little bit about each of the various brands their store carries.<\/p>\n

    In contrast, Apple\u2019s stores are popular in part because store employees are experts about Apple products. They can therefore provide customers with accurate and insightful advice about purchases and repairs. This is an important advantage that has been created through forward vertical integration.<\/p>\n

    Diversification Strategies<\/strong><\/p>\n

    Firms using diversification strategies enter entirely new industries. While vertical integration involves a firm moving into a new part of a value chain that it is already is within, diversification requires moving into new value chains. Many firms accomplish this through a merger or an acquisition, while others expand into new industries without the involvement of another firm.<\/p>\n

    Three Tests for Diversification<\/strong><\/p>\n

    A proposed diversification move should pass three tests or it should be rejected (Porter, 1987).<\/p>\n

      \n
    1. How attractive is the industry that a firm is considering entering? Unless the industry has strong profit potential, entering it may be very risky.<\/li>\n
    2. How much will it cost to enter the industry? Executives need to be sure that their firm can recoup the expenses that it absorbs in order to diversify. When Philip Morris bought 7Up in the late 1970s, it paid four times what 7Up was actually worth. Making up these costs proved to be impossible and 7Up was sold in 1986.<\/li>\n
    3. Will the new unit and the firm be better off? Unless one side or the other gains a competitive advantage, diversification should be avoided. In the case of Philip Morris and 7Up, for example, neither side benefited significantly from joining together.<\/li>\n<\/ol>\n

      Related Diversification<\/strong><\/p>\n

      Related diversification occurs when a firm moves into a new industry that has important similarities with the firm\u2019s existing industry or industries. Because films and television are both aspects of entertainment, Disney\u2019s purchase of ABC is an example of related diversification. Some firms that engage in related diversification aim to develop and exploit a core competency to become more successful. A core competency is a skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business (Prahalad & Hamel, 1990). For example, Newell Rubbermaid is skilled at identifying underperforming brands and integrating them into their three business groups: (1) home and family, (2) office products, and (3) tools, hardware, and commercial products.<\/p>\n

      Honda Motor Company provides a good example of leveraging a core competency through related diversification. Honda is best known for its cars and trucks but the company started in the motorcycle business. Through competing in the motorcycle business, Honda developed a unique ability to build small and reliable engines. When executives decided to diversify into the automobile industry, Honda was successful in part because it leveraged this ability within its new business.<\/p>\n

      Sometimes the benefits of related diversification that executives hope to enjoy are never achieved. Both soft drinks and cigarettes are products that consumers do not need. Companies must convince consumers to buy these products through marketing activities such as branding and advertising. Thus, on the surface, the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to take its existing marketing skills and apply them within a new industry. Unfortunately, the possible benefits to 7Up never materialized.<\/p>\n

      Unrelated Diversification<\/strong><\/p>\n\n\n\n\n\n
      Berkshire\u2019s insurance group includes firms such as General Re and GEICO. They maintain capital strength at exceptionally high levels, which gives them an advantage even a cave man could understand.<\/td>\nBerkshire\u2019s financial health is also fueled by utilities and energy companies that are part of the MidAmerican Energy Holdings Company.<\/td>\nTheir apparel businesses include well-known names such as Fruit of the Loom and Justin Brands.<\/td>\n<\/tr>\n
      Building companies include Acme Building Brands, makes of the famous brick, as well as paint company Benjamin Moore & Co.<\/td>\nFlightSafety International Inc. is a Berkshire firm that engages in high-tech training to aircraft and ship operators.<\/td>\nRetail holdings include a number of furniture businesses such as R.C. Willey Home Furnishings, Star Furniture Company, and Jordan\u2019s Furniture, Inc.<\/td>\n<\/tr>\n
      Hungry for more businesses to manage, Berkshire acquired The Pampered Chef, Ltd.\u2014the largest direct kitchen tools seller\u2014in 2002.<\/td>\nBuffett had a sweet tooth for See\u2019s Candies, who he purchased from the See\u2019s family in 1972.<\/td>\nShareholders were all on board for the purchase of the Burlington Northern Santa Fe Corporation in 2009.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Table 4 Unrelated Diversification at Berkshire Hathaway. \u201dDon\u2019t put all your eggs in one basket\u201d is often a good motto for individual investors. By building a portfolio of stocks, an investor can minimize the chances of suffering a huge loss. Some executives take a similar approach. Rather than trying to develop synergy across businesses, they seek greater financial stability for their firms by owning an array of companies. Warren Buffett\u2019s Berkshire Hathaway has long enjoyed strong performance by purchasing companies and improving how they are run. Below we illustrate some of the different groups in their very diversified portfolio of firm<\/em>s.<\/p>\n

      Why would a soft-drink company buy a movie studio? It\u2019s hard to imagine the logic behind such a move, but Coca-Cola did just this when it purchased Columbia Pictures in 1982 for $750 million. This is a good example of unrelated diversification, which occurs when a firm enters an industry that lacks any important similarities with the firm\u2019s existing industry or industries. Luckily for Coca-Cola, its investment paid off\u2014Columbia was sold to Sony for $3.4 billion just seven years later.<\/p>\n

      Most unrelated diversification efforts, however, do not have happy endings. Harley-Davidson, for example, once tried to sell Harley-branded bottled water. Starbucks tried to diversify into offering Starbucks-branded furniture. Both efforts were disasters. Although Harley-Davidson and Starbucks both enjoy iconic brands, these strategic resources simply did not transfer effectively to the bottled water and furniture businesses.<\/p>\n

      Lighter firm Zippo is currently trying to avoid this scenario. According to CEO Geoffrey Booth, the Zippo is viewed by consumers as a \u201crugged, durable, made in America, iconic\u201d brand (Townhall, 2010). This brand has fueled eighty years of success for the firm. But the future of the lighter business is bleak. Zippo executives expect to sell about 12 million lighters this year, which is a 50 percent decline from Zippo\u2019s sales levels in the 1990s. This downward trend is likely to continue as smoking becomes less and less attractive in many countries. To save their company, Zippo executives want to diversify.<\/p>\n

      Zippo wants to follow a path blazed by Eddie Bauer and Victorinox Swiss Army Brands Inc. The rugged outdoors image of Eddie Bauer\u2019s clothing brand has been used effectively to sell sport utility vehicles made by Ford. The high-quality image of Swiss Army knives has been used to sell Swiss Army\u2013branded luggage and watches. As of March 2011, Zippo was examining a wide variety of markets where their brand could be leveraged, including watches, clothing, wallets, pens, liquor flasks, outdoor hand warmers, playing cards, gas grills, and cologne. Trying to figure out which of these diversification options would be winners, such as the Eddie Bauer-edition Ford Explorer, and which would be losers, such as Harley-branded bottled water, was a key challenge facing Zippo executives.<\/p>\n

      Strategy at the Movies<\/strong><\/p>\n

      In Good Company<\/span><\/p>\n

      What do Techline cell phones, Sports America<\/em> magazine, and Crispity Crunch cereals have in common? Not much, but that did not stop Globodyne from buying each of these companies in its quest for synergy in the 2004 movie In Good Company<\/em>. Executive Carter Duryea was excited when his employer Globodyne purchased Waterman Publishing, the owner of Sports America<\/em> magazine. The acquisition landed him a big promotion and increased his salary to \u201cPorsche-leasing\u201d size.<\/p>\n

      Synergy is created when two or more businesses produce benefits together that could not be produced separately. While Duryea was confident that a cross-promotional strategy between his advertising division and the other units within the Globodyne universe was a slam-dunk, Waterman employee Dan Foreman saw little congruence between advertisements in Sports America<\/em> on the one hand and cell phones and breakfast cereals on the other. Despite his considerable efforts, Duryea was unable to increase ad pages in Sports America<\/em> because the unrelated nature of Globodyne\u2019s other business units inhibited his strategy of creating synergy. Seeing little value in owning a failing publishing company, Globodyne promptly sold the division to another conglomerate. After the sale, the executives that had been rewarded for the initial purchase of Waterman Publishing, including Duryea, were fired.<\/p>\n

      Globodyne\u2019s inability to successfully manage Waterman Publishing illustrates the difficulties associated with unrelated diversification. While buying companies outside a parent company\u2019s core competencies can increase the size of the company and in turn its executives\u2019 bank accounts, managing firms unfamiliar to management is generally a risky and losing proposition. Decades of research on strategic management suggest that when firms diversify, it is best to \u201cstick to the knitting.\u201d That is, stay with businesses executives are familiar with and avoid moving into ventures where little expertise exists.<\/p>\n

      Strategies for Getting Smaller<\/strong><\/p>\n

      \u201cIn what industry or industries should our firm compete?\u201d is the central question addressed by corporate-level strategy. In some cases, the answer that executives arrive at involves exiting one or more industries.<\/p>\n

      Retrenchment<\/span><\/p>\n

      In the early twentieth century, many military battles were fought in series of parallel trenches. If an attacking army advanced enough to force a defending army to abandon a trench, the defenders would move back to the next trench and try to refortify their position. This small retreat was preferable to losing the battle entirely. Trench warfare inspired the business term retrenchment. Firms following a retrenchment strategy shrink one or more of their business units. Much like an army under attack, firms using this strategy hope to make just a small retreat rather than losing a battle for survival.<\/p>\n

      Retrenchment is often accomplished through laying off employees. In July 2011, for example, South African grocery store chain Pick n Pay announced plans to release more than 3,000 of its estimated 36,000 workers. Just over a month earlier, South African officials had approved Walmart\u2019s acquisition of a leading local retailer called Massmart. Rivalry in the South African grocery business seemed likely to become fiercer, and Pick n Pay executives needed to cut costs for their firm to remain competitive.<\/p>\n

      A Pick n Pay executive explained the layoffs by noting that \u201cthe decision was not taken lightly but was required to ensure the viability of the retail business and its employees into the future (Chilwane, 2011).\u201d This is a common rationale for retrenchment\u2014by shrinking the size of a firm, executives hope that the firm can survive as a profitable enterprise. Without becoming smaller and more cost effective, Pick n Pay and other firms that use retrenchment can risk total failure.<\/p>\n

      Restructuring<\/strong><\/p>\n\n\n\n\n\n\n\n
      There are 17 billion of Freescale Semiconductor\u2019s chips in use around the world. The firm was spun-off from Motorola in 2004.<\/td>\n<\/tr>\n
      Toyota started in the car business, right? Wrong. The firm was spun-off in the 1930s from Toyoda Automatic Loom Works\u2014a company that produced commercial weaving looms.<\/td>\n<\/tr>\n
      The 2000 merger between America Online (AOL) and Time Warner was one of the largest in history. The firms split in 2009. Net result? A staggering $99 billion loss.<\/td>\n<\/tr>\n
      Delphi Automotive\u2014an automotive parts company headquartered in Troy, Michigan\u2014is a spin-off from General Motors.<\/td>\n<\/tr>\n
      Guidant Corporation\u2014a spin-off from Eli Lilly\u2014designs and manufacturers artificial pacemakers, defibrillators, stents, and other heart-helpful medical products.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Table 5 Spin Offs. Spin-offs occur when businesses create a new firm from a piece of their operations. Because some diversified firms are too complex for investors to understand, breaking them up can create wealth by resulting in greater stock market valuations. Spinning off a company also reduces management layers, which can lower costs and speed up decision making. Below we describe a variety of firms that were created as spin-offs.<\/em><\/p>\n

      Executives sometimes decide that bolder moves than retrenchment are needed for their firms to be successful in the future. Divestment refers to selling off part of a firm\u2019s operations. In some cases, divestment reverses a forward vertical integration strategy, such as when Ford sold Hertz. Divestment can also be used to reverse backward vertical integration. General Motors (GM), for example, turned a parts supplier called Delphi Automotive Systems Corporation from a GM subsidiary into an independent firm. This was done via a spin-off, which involves creating a new company whose stock is owned by investors. GM stockholders received 0.69893 shares of Delphi for every share of stock they owned in GM. A stockholder who owned 100 shares of GM received 69 shares of the new company plus a small cash payment in lieu of a fractional share.<\/p>\n

      Divestment also serves as a means to undo diversification strategies. Divestment can be especially appealing to executives in charge of firms that have engaged in unrelated diversification. Investors often struggle to understand the complexity of diversified firms, and this can result in relatively poor performance by the stocks of such firms. This is known as a diversification discount. Executives sometimes attempt to unlock hidden shareholder value by breaking up diversified companies.<\/p>\n

      Fortune Brands provides a good example. Surprisingly, this company does not own Fortune<\/em> magazine, but it has been involved in a diverse set of industries. As of 2010, the firm consisted of three businesses: spirits (including Jim Beam and Maker\u2019s Mark), household goods (including Masterlock and Moen Faucets), and golf equipment (including Titleist clubs and balls as well as FootJoy shoes). In December 2010, Fortune Brand\u2019s CEO announced a plan to separate the three businesses to \u201cmaximize long-term value for our shareholders and to create exciting opportunities within our businesses (Sauerhaft, 2011).\u201d Fortune Brands took the first step toward overcoming the diversification discount in May 2011 when it reached an agreement to sell its gold business to Fila. In June 2011, plans to spin off the home products business were announced.<\/p>\n

      Executives are sometimes forced to admit that the operations that they want to abandon have no value. If selling off part of a business is not possible, the best option may be liquidation. This involves simply shutting down portions of a firm\u2019s operations, often at a tremendous financial loss. GM has done this by scrapping its Geo, Saturn, Oldsmobile, and Pontiac brands. Ford recently followed this approach by shutting down its Mercury brand. Such moves are painful because massive investments are written off, but becoming \u201cleaner and meaner\u201d may save a company from total ruin.<\/p>\n

      Portfolio Planning and Corporate-Level Strategy<\/strong><\/p>\n

      Executives in charge of firms involved in many different businesses must figure out how to manage such portfolios. General Electric (GE), for example, competes in a very wide variety of industries, including financial services, insurance, television, theme parks, electricity generation, lightbulbs, robotics, medical equipment, railroad locomotives, and aircraft jet engines. When leading a company such as GE, executives must decide which units to grow, which ones to shrink, and which ones to abandon.<\/p>\n

      Portfolio planning can be a useful tool. Portfolio planning is a process that helps executives assess their firms\u2019 prospects for success within each of its industries, offers suggestions about what to do within each industry, and provides ideas for how to allocate resources across industries. Portfolio planning first gained widespread attention in the 1970s, and it remains a popular tool among executives today.<\/p>\n

      The Boston Consulting Group (BCG) Matrix<\/span><\/p>\n

      The Boston Consulting Group (BCG) matrix is the best-known approach to portfolio planning. Using the matrix requires a firm\u2019s businesses to be categorized as high or low along two dimensions: its share of the market and the growth rate of its industry. High market share units within slow-growing industries are called cash cows. Because their industries have bleak prospects, profits from cash cows should not be invested back into cash cows but rather diverted to more promising businesses. Low market share units within slow-growing industries are called dogs. These units are good candidates for divestment. High market share units within fast-growing industries are called stars. These units have bright prospects and thus are good candidates for growth. Finally, low-market-share units within fast-growing industries are called question marks. Executives must decide whether to build these units into stars or to divest them.<\/p>\n

      The BCG matrix is just one portfolio planning technique. With the help of a leading consulting firm, GE developed the attractiveness-strength matrix to examine its diverse activities. This planning approach involves rating each of a firm\u2019s businesses in terms of the attractiveness of the industry and the firm\u2019s strength within the industry. Each dimension is divided into three categories, resulting in nine boxes. Each of these boxes has a set of recommendations associated with it.<\/p>\n\n\n\n\n\n
      <\/td>\nHigh Relative Market Share<\/strong><\/td>\nLow Relative Market Share<\/strong><\/td>\n<\/tr>\n
      High Industry Growth Rate<\/strong><\/td>\nStars should be funded and encourage to grow.<\/td>\nQuestion marks should be resolved by executives by deciding whether to foster or sell these units.<\/td>\n<\/tr>\n
      Low Industry Growth Rate<\/strong><\/td>\nCash cows should be \u201cmilked\u201d to supply funds to more promising businesses.<\/td>\nIt sounds mean, but dogs should be sold if possible and abandoned if necessary.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

      Table 6 The Boston Consulting Group (BCG) Matrix. The Boston Consulting Group (BCG) matrix is the best-known approach to portfolio planning\u2014assessing a firm\u2019s prospects for success within the industries in which it competes. The matrix categorizes businesses as high or low along two dimensions\u2014the firm\u2019s market share in each industry and the growth rate of each industry. Suggestions are then offered about how to approach each industry.<\/em><\/p>\n

      Limitations to Portfolio Planning<\/strong><\/p>\n

      Although portfolio planning is a useful tool, this tool has important limitations. First, portfolio planning oversimplifies the reality of competition by focusing on just two dimensions when analyzing a company\u2019s operations within an industry. Many dimensions are important to consider when making strategic decisions, not just two. Second, portfolio planning can create motivational problems among employees. For example, if workers know that their firm\u2019s executives believe in the BCG matrix and that their subsidiary is classified as a dog, then they may give up any hope for the future. Similarly, workers within cash cow units could become dismayed once they realize that the profits that they help create will be diverted to boost other areas of the firm. Third, portfolio planning does not help identify new opportunities. Because this tool only deals with existing businesses, it cannot reveal what new industries a firm should consider entering.<\/p>\n

      References<\/p>\n

      Ansoff, H. I. 1957. Strategies for diversification. Harvard Business Review<\/em>, 35<\/em>(5), 113\u2013124.<\/p>\n

      Chilwane, L. 2011, July 7. Pick n Pay to retrench. The New Age<\/em>. Retrieved from http:\/\/www.thenewage.co.za\/22462-1025-53-Pick_n_Pay_to_retrench<\/a>.<\/p>\n

      Henry, D. 2002, October 14. Mergers: Why most big deals don\u2019t pay off. Business Week<\/em>, 60\u201370.<\/p>\n

      Hitt, M. A., Harrison, J. S., & Ireland, R. D. 2001. Mergers and acquisitions: A guide to creating value for stakeholders<\/em>. New York, NY: Oxford University Press.<\/p>\n

      Porter, M. E. 1987. From competitive advantage to corporate strategy. Harvard Business Review<\/em>, 65<\/em>(3), 102\u2013121.<\/p>\n

      Prahalad, C. K., & Hamel, G. 1990. The core competencies of the corporation. Harvard Business Review<\/em>, 86<\/em>(1), 79\u201391.<\/p>\n

      Sauerhaft, R. 2011, May 20. Fortune Brands to sell Titleist and FootJoy to Fila Korea. Golf.com. Retrieved from http:\/\/www.golf.com\/golf\/tours_news\/article\/0,28136,2073173,00.html#ixzz1MvXStp2b<\/a>.<\/p>\n

      Townhall, http:\/\/th2010.townhall.com\/news\/us\/2011\/03\/20\/zippos_burning_ambition_lies_in_ retail_expansion<\/a>.<\/p>\n

      <\/div>\n
      Wagenheim, J. 2011, March 12. UFC buys out Strikeforce in another step toward global domination. SI.com. Retrieved from http:\/\/sportsillustrated.cnn.com\/2011\/writers\/jeff_wagenheim\/03\/12\/strikeforce-purchased\/index.html.<\/div>\n
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