Student Learning Notes
MCR008 – Corporate Strategy
Student Learning Notes
Topic 6: Corporate-Level Strategies and Topic 7: Mergers and Acquisitions
(Chapter 8 – Corporate Level Strategy)
1. What is corporate-level strategy? Why is corporate-level strategy important for a company
seeking rapid growth?
Corporate-level strategy is about how and where a company, as a whole, competes. It is the master
plan of a company and includes diversification, integration, merger and acquisition, turnaround and
retrenchment strategies. Corporate-level strategy is important for a company seeking rapid growth
because it takes into account the most critical long-run consideration for the organisation which is
the development of organisational capability in deciding which parts of the value chain to engage in.
Corporate-level strategy has a focus on growth – the organisation needs to know how to add and
create value to each of its individual businesses. If the organisation adopts a single-business strategy
and it has been successful using this strategy, the organisation may want to consider reinvesting its
profits into new business areas or growing markets. The organisation may also want to establish
new businesses or acquiring other related businesses to grow and diversify the scope of the
company’s strategy.
2. Why is a diversification strategy in the Asia-Pacific region not as easy in 2014 as it might have
been in the early 1990s?
Diversification strategy in the Asia Pacific region is not as easy in 2014 due to a number of reasons.
One is the fact that many competitors have already diversified into previously untapped markets. In
the early 1990s, some of the competitors could enter China or Vietnam or Bangladesh, and set up
their operations to create value. In 2014, on the other hand, many companies have set up their
operations there and thus, the growth of these markets is not as high as anticipated. In addition, the
costs of entering these markets may no longer be low. For example, China used to be known as a
country where labour, land and other resources can be obtained relatively cheaply. In recent times,
reports have noted that setting up operations in China may no longer be considered cheap, and this
has forced many MNCs to look for other countries/regions where resources can still be obtained
relatively cheaply and the external environment is favourable for their operations.
3. What are the merits of vertical integration? What are the differences between horizontal and
vertical integration?
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Vertical integration refers to a company’s ownership of vertically related activities. The greater the
company’s ownership and control over successive stages of the value chain for its product, the
greater its degree of vertical integration. The extent of vertical integration is indicated by the ratio
of a company’s value added to its sales revenue. Highly integrated companies tend to have low
expenditures on bought-in goods and services relative to their sales. Vertical integration can be
either backward, where the company takes over ownership and control of producing its own
components or other inputs, or forward, where the company takes over ownership and control of
activities previously undertaken by its customers.
Horizontal integration is a form of expansion by which a company expands its business activities by
taking over or merging with another business in the same industry and at the same level in the
supply chain. A company can achieve horizontal growth through mergers and acquisitions of other
companies that offer similar products or services.
4. What are the differences between a merger and an acquisition? When and why are they
useful?
A merger is a transaction in which the assets of at least two companies are transferred to a new
company so that only one separate legal entity remains. In other words, a merger is when two
companies agree to go forward as a single new company rather than remain separately owned and
operated. Acquisition is a transaction in which both companies in the transaction can survive but
the acquirer increases its percentage ownership in the target.
Mergers and acquisitions refer to the aspects of corporate-level strategy that deal with the buying,
selling and combining of different companies that can help a company in a given industry grow
rapidly without having to create another business entity.
5. Compare and contrast related and unrelated diversification. When will unrelated
diversification be more useful?
There are two types of diversification. The first type, related diversification (or concentric
diversification), is about the expansion of the business based on the common core of a company’s
existing resources and capabilities. With related diversification, synergy increases because the
related activity can increase value and the economies of scale can save money. Unrelated
diversification (or conglomerate diversification) is used to improve the profitability and lower the
overall business risk of a company.
Unrelated diversification is more useful when there is no common thread of strategic fit or
relationship between the new and old lines of business; the new and old businesses are unrelated.
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Organisations that adopt conglomerate diversification strategy may divest the unprofitable
businesses without much impact on their other businesses.
6. When is a retrenchment strategy necessary?
Retrenchment is a corporate-level strategy that seeks to reduce the size or diversity of an
organisation’s operations. It includes all activities involving the contraction of a company’s
operations or changes in its assets or financial structure.
Retrenchment usually revolves around cutting costs. It enables senior managers of underperforming
companies to understand the critical causes of poor results in order to stem losses and restore
growth. A well-crafted retrenchment strategy leads companies to quickly achieve their full
potential. This involves reducing costs, restructuring finances and redefining strategic objectives.
7. An ice-cream manufacturer is proposing to acquire a soup manufacturer on the basis that,
first, its sales and profits will be more seasonally balanced and, second, from year to year,
sales and profits will be less affected by variations in weather. Will this spreading of risk
create value for shareholders? Under what circumstances could this acquisition create
benefits for shareholders?
The acquisition of a new business is complex and fraught with peril. The best acquisitions follow a
structured and disciplined approach, with clear strategic objectives, detailed implementation plans
and a focus on creating and capturing value. Whether the acquisition will create value depends on
the followings:
(a) where real economies can be gained by merging the two businesses. Thus, if employees can be
redeployed between ice cream and soup production and if certain functions (e.g. distribution, HR,
accounts, and finance) can be combined, then the merger might boost the cash flows of each
business.
(b) As long as the cash flows of the individual businesses are unaffected by the merger, less
variability does not create value for owners. If the two businesses are public companies, then
shareholders can undertake their own risk reduction through holding portfolios of different
companies’ stocks.
8. Tata Group is one of India’s largest companies, employing 203,000 people in many different
industries, including steel, motor vehicles, watches and jewellery, telecommunications,
financial services, management consulting, food products, tea, chemicals and fertilisers,
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satellite TV, hotels, motor vehicles, energy, IT and construction. Such diversity far exceeds
that of any North American, western European or Australian company. What are the
conditions in India that might make such broad-based diversification both feasible and
profitable?
Tata Group lacks close operational linkages between its businesses – they are simply too diverse.
Tata Group adds value through allocating investment funds and personnel between its different
businesses, deploying its top management expertise, and establishing and developing new
businesses. The essential condition for this to work is that Tata needs to be more efficient in
managing these processes than are external markets. In the US and UK, conglomerate firms no
longer have any general advantage in allocating investment funds, motivating business managers,
or starting-up new businesses – all these functions are performed efficiently by the capital markets.
In India, capital markets are less efficient, venture capital is less developed, and labour markets for
managers and other skilled professionals are less developed. In these circumstances, not only is
Tata able to utilise its internal information and sophisticated decision-making systems to allocate
resources more effectively, it may also benefit from lower resource costs (in particular, a lower cost
of capital than smaller, more specialised companies).
Apart from financial and human resources, other resources that Tata can deploy across its different
business are its influence on their external environment and the business relationships that it has.
In a highly regulated country like India, political influence is critically important. Tata’s size and
diversity undoubtedly give it considerable power within both state and federal governments. Its
international network of relationships also allows it to be a preferred joint venture partner for
foreign multinationals seeking to invest in India.
9. Giorgio Armani is an Italian private company owned mainly by the Armani family. Most of its
clothing and accessories are produced and marketed by the company (some are manufactured
by outside contractors). For other products, notably fragrances, cosmetics and eyewear,
Armani licenses its brand names to other companies. Armani is considering expanding into
athletic clothing, hotels and bridal shops. Advise Armani on whether these new businesses
should be developed in-house, by joint ventures or by licensing the Armani brands to
specialist companies already within these fields.
In choosing between licensing, joint venture, or wholly owned diversifications, the key criteria are
likely to be:
 The transaction costs associated with licensing Armani’s brand: If licensing contracts can be
easily written and easily enforced, then licensing represents a viable and attractive strategy for
exploiting these markets. However, if there are risks from licensees oversupplying the market,
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supplying products that are not consistent with Armani’s image and quality, or undermining
Armani’s reputation in any other way, then licensing may be risky.
 The opportunities for sharing or transferring Armani’s other resources and capabilities with/to
the new businesses: Apart from its brand, which of Armani’s other resources and capabilities
can be utilised in the new business? In the case of bridal clothing and accessories, Armani can
probably utilise its existing design, manufacturing, marketing, and distribution capabilities – in
which case Armani can develop this business in-house. In the case of athletic clothing and
equipment, Armani may need to access the technical capabilities needed to design products for
different sports – hence, a joint venture may be appropriate. In the case of hotel management,
it is not apparent that any of Armani’s resources and capabilities (other than its brand) relates
to the design and operation of luxury hotels – hence, licensing may be the best solution.
10. General Electric, Berkshire Hathaway and Richard Branson’s Virgin Group each comprise a
wide range of different businesses that appear to have few close technical or customer
linkages. Are these examples of unrelated diversification and do the corporate and ownership
links within each of the groups result in the creation of any value? If so, what are the sources
of this value creation?
The distinction between ‘related’ and ‘unrelated’ diversification must be clear – relatedness refers
to common resources and capabilities, not similarities of products and technologies.
General Electric would appear to have close connections between the groups. The groups consist of:
aviation, electrical distribution, energy, finance, healthcare, lighting, oil and gas, transportation, and
water. The products are not obviously related products; however, GE only ventures into areas
where they are able to exploit their resources and capabilities in innovation. They call this the
‘power of imagination’ to make life better. This would not be considered as unrelated
diversification, but GE is known to adopt a related linked strategy (the groups are linked through
exploiting its capabilities although they do not share similarities of product/service offerings
between them).
Berkshire Hathaway once again does not really adopt the unrelated diversification. The groups of
companies under Berkshire are mainly in insurance business. They also have groups that manage
diamonds, flight safety, furniture, and furnishings. All these products actually require insurance and
that’s when Berkshire can offer the variety of insurance products they have through a number of
their companies. This is the value creation for Berkshire Hathaway by being able to offer their core
products of insurance to their other product lines. Berkshire Hathaway is said to adopt the related
linked strategy.
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The Virgin Group, on the other hand, would be considered as adopting unrelated diversification
strategy. The companies under this group are entirely different and are unable to exploit the
economies of scope in joint inputs or exploiting its capabilities. The Virgin Group has many
companies including those that deal in wines, records, books, gym clubs, travel, aviation, and many
others. The sources of value creation for Virgin would be from exploiting Sir Richard Branson’s
brand name, general management capabilities, and resource allocation processes.
11. Zara manufactures close to half of the clothes sold in its retail stores and undertakes all of its
own distribution from manufacturing plants to retail outlets. Gap outsources production and
distribution. Should Zara outsource its manufacturing and distribution? Should Gap backward
integrate into production and distribution? Why?
Zara – like American Apparel – is an interesting and unusual example of a vertically integrated
fashion clothing company. The dominant model in fashion clothing is for retailing and
manufacturing to be undertaken by different companies. Thus, Gap does its own design, but its
manufacturing is undertaken by contractors, mostly in Southeast Asia. The advantages of this
system are:
 It avoids the problem of managing manufacturing plants far away from the retailers’ retail
operations and corporate head offices.
 Retailing and manufacturing are strategically dissimilar – different capabilities, different optimal
scale.
 It offers flexibility to both sides in adapting to uncertainty. Retailers can shift sourcing according
to the costs and exchange rates. Manufacturers can hedge risk by supplying different retailers.
Zara has succeeded by creating a vertically integrated system where the disadvantages of vertical
integration (higher costs of manufacturing in Europe, lack of flexibility in shifting plant locations,
etc.) are offset by the unprecedented speed and design flexibility that tightly coordinated vertical
system permits. Thus, Zara’s highly compressed product development cycle would be impossible for
Gap or any other retailer relying on contract manufacturers in Southeast Asia. Zara’s vertical
integration works for Zara because it fits with other aspects of its strategy: mid-market pricing, highfashion orientation, and constantly changing product range. For Gap, vertical integration probably
would not work: its pricing is relatively low (hence, it needs to produce in low-wage countries), it
does not have manufacturing experience, and its products tend to be basic staple (jeans, T-shirts,
khaki pants and shorts) such that seasonal product changes are adequate to keep abreast of
changing market preferences.
12. If you were VP of strategic planning for a large multi-busines company, would you use
portfolio planning techniques in your work? If so, for what purposes? If not, why not? Would
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your preference be to use the GE-McKinsey nine-box matrix or the BCG matrix? Explain the
rationale behind your choice.
Yes, the portfolio planning techniques would be useful in dealing with strategic planning for a large
multi-business company. I find that the BCG matrix simpler but I would prefer to use the GEMcKinsey nine-box matrix. Several reasons for this:
– I would probably be looking at different markets and therefore it is important for me to be
able to analyse the attractiveness of each market and to see if my product offerings (or
potential product offerings) are positioned in an attractive market;
– For potential product offerings, I would not know of the market share (I would assume that
as an initial offering, the market share of my product will not be high but this will not tell me
anything much), and therefore the BCG matrix may not help me with my strategic planning.
Rather, I would need to be able to analyse my competitive strengths if I were to go ahead
with my product offerings. This would be looking at what strengths that I can bring to offer
something different, unique, at a competitive cost and meeting the customers’ demands and
needs. The GE-McKinsey matrix would be more suitable.