Corporate-Level Strategies – My Assignment Tutor

Strategic Management: Theory andPracticeCorporate-Level StrategiesContributors: By: John A. ParnellBook Title: Strategic Management: Theory and PracticeChapter Title: “Corporate-Level Strategies”Pub. Date: 2014Access Date: March 7, 2018Publishing Company: SAGE Publications, LtdCity: 55 City RoadPrint ISBN: 9781452234984Online ISBN: 9781506374598DOI: pages: 150-181©2014 SAGE Publications, Ltd. All Rights Reserved.This PDF has been generated from SAGE Knowledge. Please note that the pagination ofthe online version will vary from the pagination of the print book.Corporate-Level StrategiesChapter OutlineThe Corporate ProfileStrategic Alternatives at the Corporate LevelGrowth StrategiesHorizontal (Related) IntegrationHorizontal (Related) DiversificationConglomerate (Unrelated) DiversificationVertical IntegrationStrategic Alliances (Partnerships)Stability StrategyRetrenchment StrategiesTurnaroundDivestmentLiquidationBoston Consulting Group Growth-Share MatrixGlobal Corporate StrategySAGE SAGE BooksContact SAGE Publications at 2 of 42 SAGE Books – Corporate-Level StrategiesWal-Mart AbroadGlobal Orientation AssessmentSummaryKey TermsReview Questions and ExercisesPractice QuizStudent Study SiteNotesStrategies exist at three levels in any organization: (1) the corporate or firm level, (2) thebusiness unit or competitive level, and (3) the functional or tactical level. This chapter focuseson the corporate-level strategy, or the strategy top management formulates for the overallcorporation. Corporate-level strategy concerns precede the competitive and tactical issuesrelated to business and functional strategies. We will see in subsequent chapters, however,that all three levels are linked and should be aligned.The Corporate ProfileThe first step in formulating an organization’s strategy is to assess the markets or industries inwhich the firm operates. The corporate profile identifies one or more businesses andindustries in which the firm is and/or should be operating. A firm may choose one of threebasic profiles: (1) to operate in a single industry, (2) to operate in multiple related industries,and (3) to operate in multiple unrelated industries.Most firms start as single-business companies, and many continue to thrive while remainingactive primarily in one industry. By competing in only one industry, firms such as UPS,ExxonMobil, and Home Depot can benefit from the specialized knowledge that develops fromconcentrating efforts on one business area. This knowledge can help the firm improve productor service quality and become more efficient in its operations. Firms operating in a singleindustry are more susceptible to sharp downturns in business cycles, however. For thisreason, most large firms eventually pursue diversification and compete in more than oneindustry. Diversification allows a firm to grow, (potentially) use its resources more effectively,and make use of surplus revenues.Firms that diversify may choose to compete in related or unrelated industries. Relateddiversification involves diversifying into similar businesses that may complement the original orprimary business. Wal-Mart—which also operates Sam’s Wholesale Club—benefits fromexpertise derived from concentration in multiple retailing industries. In contrast, GeneralElectric (GE) operates in a vast array of unrelated businesses ranging from TVs to aircraftengines to financial services.SAGE SAGE BooksContact SAGE Publications at 3 of 42 SAGE Books – Corporate-Level StrategiesAlthough diversification can reduce the uncertainty and risk associated with operating in asingle industry, participating in numerous unrelated businesses may result in uncertaintiesassociated with losing touch with the fundamentals of each business. As a result, manyscholars and executives occupy the “middle ground” by arguing that aggregate uncertainty isminimized when a firm diversifies its holdings but only into related industries.1. Relatedness,however, is ultimately “in the eyes of the beholder” and can be based on clear similaritiessuch as product lines or customers or on less obvious bases such as distribution channels orsimilarities in raw materials.Unrelated diversification is driven by the desire to capitalize on profit opportunities in a givenindustry and involves the corporation in businesses that typically are dissimilar. Although suchan approach may reduce risk for the firm, it also carries a number of potential disadvantages.Because their interests are dispersed throughout unrelated business units, strategicmanagers may not stay abreast of market and technological changes that affect thebusinesses. In addition, they may unknowingly neglect the firm’s primary, or core, business infavor of one or more other units. Avoiding these pitfalls is easier when a firm’s business unitsare related.The key to successful related diversification is the development of synergy among the relatedbusiness units. Synergy occurs when the combination of two organizations results in highereffectiveness and efficiency than would otherwise be generated separately. Opportunities forsynergy are not always easy to identify. Synergy may occur when there are similarities inproduct or service lines, relationships in the distribution channels, or complementarymanagerial or technical expertise across business units. Kraft’s intense pursuit of Cadbury in2009 was driven in large part by a desire to benefit from Cadbury’s strong presence inemerging markets like India, Mexico, Thailand, and Egypt. For example, Kraft lackedsignificant access to India’s $500 million chocolate market. The Cadbury brand was alreadywell known in India with brands such as Crackle and Dairy Milk.2.Synergy between business units does not always materialize as originally planned, however.For example, when Sports Illustrated campaigned in 2005 to merge its website with theAmerica Online (AOL) web portal to create a massive sports site, AOL balked, suggesting thatSports Illustrated had too little to offer. Several years prior, parent company Time Warnermight have encouraged the partnership between its two business units under the guise of“corporate synergy,” but instead Time Warner president Jeffrey Bewkes told the magazine tolook elsewhere for a partner. Unlike his predecessors who preached synergy among TimeWarner business units, Bewkes challenged the universality of the synergy concept and beganselling off less profitable businesses.3. After continued frustrations, Time Warner spun off itsAOL division in 2009.4.Procter & Gamble (P&G) anticipated synergy when it acquired Gillette in 2005. On paper,combining the world’s leading toothbrush—Oral B—and the world’s second leadingtoothpaste—Crest—seemed easy enough. There were a number of problems, however.Combining the structures of the two firms with dual presidents was so complex that one ofthem stepped down. Many Oral-B employees decided to leave the company instead ofrelocating from Boston to Cincinnati. Culture also played a role, as Oral-B executives preferface-to-face meetings and quick decisions, while their counterparts at Crest send lots ofmemos and deliberate more before making decisions. P&G has a way to go in its quest toovertake Colgate-Palmolive, a leader in the overall oral care market.5.SAGE SAGE BooksContact SAGE Publications at 4 of 42 SAGE Books – Corporate-Level Strategiesa. another example, when CVS acquired pharmacy-benefits manager Caremark Rx in 2007,the California Public Employees’ Retirement System (CALPERS) voted more than 2.1 millionCaremark shares and more than 3.1 million CVS shares against the deal. CALPERS officialscharged that poor synergy existed between the retailer and the benefits manager.6.There is no single best corporate profile; the best approach depends on the organization.There are a number of successful organizations that have pursued each of these options.After the corporate profile is selected, the next consideration is the corporate strategy.Strategic Alternatives at the Corporate LevelThree basic strategic alternatives exist at the corporate level: (1) growth, (2) stability, and (3)retrenchment. The available strategies are listed in Table 6.1.Table 6.1 Corporate-Level StrategiesGrowth strategiesInternal growthExternal growthHorizontal integrationHorizontal related diversificationConglomerate (unrelated) diversificationVertical integrationStrategic alliancesStability strategyRetrenchment strategiesTurnaroundDivestmentLiquidationGrowth StrategiesThe growth strategy seeks to increase significantly a firm’s revenues or market share.Although some top executives argue that growth is always the single best strategy for ahealthy firm, this is not the case. Rather, a firm should adopt a growth strategy only if growthis expected to increase firm value.Growth is attained primarily by two means. Internal growth is accomplished when a firmincreases revenues, production capacity, and its workforce; it can occur by growing anexisting business or creating new ones. Capitalizing on the increased interest in organic andnatural foods, Whole Foods grew internally from a single store in 1980 to 270 in the UnitedStates and United Kingdom in 2009.7. Walgreens experienced substantial internal growth inthe 1990s and early to mid-2000s by opening a new store every 16 hours. During therecession of the late 2000s and early 2010s, Walgreens continued to pursue internal growthbut by refashioning itself as a broad health care provider8.Internal growth is not always easy to accomplish, especially when markets appear to besaturated. Consider the fast-food and fast casual segments of the broader restaurant industry.SAGE SAGE BooksContact SAGE Publications at 5 of 42 SAGE Books – Corporate-Level StrategiesFaced with limited growth prospects, small chains like Cousins Submarines, Tasti D-Lite, andToppers Pizza launched mobile franchises, trucks, or vans outfitted with fully operatingkitchens. Facilities are much more extensive than the ones operated by street vendors in largecities, but franchisees must still get past licensing challenges due to permit restrictions. Withmarket saturation in most large cities in the United States, these restaurants are finding itdifficult to grow.9.McDonald’s has grown internally by attracting customers in nonpeak periods and expandinghours of operation in many of its stores. Its McCafé line and snack products attract customersduring times when business slows at most fast-food restaurants. Many of its locationsthroughout the world are now open 24 hours a day.10. McDonald’s maintains its leadershipposition in the $175 billion U.S. fast-food industry not only because it has more stores butbecause each one produces significantly more revenue than its closest rivals. Interestingly,Wendy’s gained ground on Burger King in the late 2000s. Although the number of storesremained relatively flat for both competitors, per-store sales declined at Burger King but roseslightly at Wendy’s during this time (see Table 6.2).11.Table 6.2 Leaders in the U.S. Fast-Food Industry (2010)12.Firm Number of U.S. Stores Sales Per StoreMcDonald’s 14,027 $2.3 millionBurger King 7,264 $1.2 millionWendy’s 5,883 $1.4 millionExternal growth is accomplished when two firms merge or one acquires the other. A mergeroccurs when two or more firms, usually of roughly similar sizes, combine into one through anexchange of stock. An acquisition is a form of a merger whereby one firm purchases another,often with a combination of cash and stock. Merger and acquisition (M&A) activity isinfluenced by a number of factors, including valuations, competitive forces, and the economy.M&A activity increased during the 2000s but declined sharply in the early 2010s as globaleconomic uncertainty rose.13.Firms with large, successful businesses often acquire smaller competitors with different orcomplementary product or service lines. For example, Mars acquired Wrigley in 2008 to createa global candy powerhouse.14. PepsiCo acquired Russian dairy products and fruit juicemaker Wimm-Bill-Dann in 2010, the largest acquisition for the company since purchasingQuaker Oats in 2001 and one that established PepsiCo as the largest food and beverage firmin Russia.15. With its acquisition of AirTran in 2011, Southwest Airlines gained access toAirTran’s routes in the eastern and southeastern regions of the United States and establisheda toehold at Hartsfield-Jackson Atlanta International Airport, the world’s busiest airport locatedin Atlanta, Georgia.16.Smaller firms can acquire larger rivals, however, as Triarc Companies (the parent company ofArby’s) acquired Wendy’s International in 2008 and formed Wendy’s/Arby’s Group, Inc.17.Following many years of Arby’s decline, an 81.5% interest in the brand was sold to RoarkCapital Group in 2011. The $130 million cash payment helped Wendy’s finance a revamp ofits menu and promote international growth efforts without Arby’s as a distraction.18.SAGE SAGE BooksContact SAGE Publications at 6 of 42 SAGE Books – Corporate-Level StrategiesThere are clear advantages to both internal and external growth. Internal growth enables afirm to maintain control over the enterprise by adding new products, facilities, or businessesincrementally. Internal growth enables the firm to preserve its corporate culture and imagewhile expanding at a more controlled pace.The attractiveness of external growth through mergers and acquisitions is intuitive. Two firmsjoin forces, and the combined organization possesses all the strengths of the individual firms.Indeed, when two firms possess complementary resources and cooperate in a friendlyacquisition or merger, the results can be positive (see Strategy at Work 6.1).Strategy at Work 6.1. Sears and Kmart Join Forces19.Kmart acquired Sears in November 2004 in an $11.5 billion deal that placed the newlycombined firm-named Sears Holding Corporation-in the number three U.S. retailingposition behind Wal-Mart and Home Depot. The move followed a decade of strugglesby both century-old companies.Prior to the acquisition, Sears boasted more stores (2,000 vs. 1,500) and employees(249,000 vs. 144,000) than Kmart. From a financial perspective, Kmart was showingsigns of turning around several years of dismal performance, generating $801 million inprofit during the first 9 months of 2004, while Sears had reported $61 million in losses.It was immediately confirmed that the total number of stores and employees would bereduced as the new firm restructures.Those behind the deal hoped for improved efficiencies, with each retailer adding anumber of successful product lines from the other. Prior to the acquisition, Sears waswidely believed to be the stronger brand, bringing with it Craftsman tools, DieHardbatteries, Kenmore appliances, and Lands’ End apparel. Kmart’s key brands includedMartha Stewart, Jaclyn Smith, Joe Boxer, Route 66, and Sesame Street. Insidersexpected some repositioning of the store brands, with Kmart becoming a slightly moreupscale retailer and Sears moving in the opposite direction.Aside from some product overlap, the years following the acquisition have revealedlittle evidence of synergy, with sluggish performance at both retailers. Overall sales forboth retailers declined every year between 2005 and 2011. Approximately 171 full-sizeSears locations were closed during that time. Following a lackluster 2011 Christmasseason, plans were announced to close another 1,200 stores to generate muchneeded cash.20. Some analysts believe the downturn is linked to a lack ofmaintenance in aging stores. While retailers typically spend about $6 to $8 per squarefoot annually on maintenance, Sears has spent only $1.90.There are a number of shortcomings associated with external growth, however. In anacquisition, the acquiring firm typically must pay a premium (i.e., an amount greater than thecurrent share price) to obtain the firm, thereby increasing the debt load. Top managers in theacquired firm often depart the organization as well. Moreover, regulators often scuttle M&ASAGE SAGE BooksContact SAGE Publications at 7 of 42 SAGE Books – Corporate-Level Strategiesefforts, arguing that competition will be infringed. In 2011, AT&T agreed to acquire wirelesscarrier T-Mobile for $39 billion, only to withdraw its proposal 9 months later after the U.S.Department of Justice (DOJ) sued to block the merger.21.There can be other problems as well. Achieving the anticipated synergy from a merger oracquisition can be elusive. In 1990, Time acquired Warner Communications for $14 billion toform Time Warner. In 1996, Time Warner acquired Turner Broadcasting System for $7.6billion. In 2001, however, AOL acquired Time Warner but dropped AOL from its name in 2003.Since that time, the firm has experienced problems coordinating the activities of its businessunits. The firm sold its music division in 2004 and its book division in 2006. Strife between twoof its business units—Sports Illustrated and AOL—was common in the mid-2000s, so much sothat Jeffrey Bewkes, president of Time Warner, advised the magazine to look elsewhere forpartners if it could not work with AOL. The corporate synergy Time Warner executivesanticipated in the early 2000s simply did not materialize.22.Blending two distinct cultures or ways of thinking can be difficult amidst the rumors of layoffsand restructuring that often accompany a merger or acquisition.23. This is especially the caseacross borders. Although carmakers Chrysler and Daimler-Benz merged to formDaimlerChrysler in 1998, complete cooperation between members from the two originalorganizations was slow to develop. During the first few years of the merger, Mercedesexecutives closely guarded their technology from Chrysler for fear of eroding the Mercedesmystique. The Crossfire—a Chrysler design with Mercedes components—was introduced in2004 and represented the first joint vehicle. The synergy never seemed to materialize,however, and most of Chrysler was sold to a private investment group, Cerberus, for $7.4billion in 2007. After other financial considerations were taken into account, Daimler actuallypaid Cerberus about $500 million to take the financially strapped carmaker it had paid $36billion for 9 years earlier.24. Fiat merged with Chrysler in 2009 to stave off bankruptcy.Another example of a cultural challenge is InBev’s acquisition of Anheuser-Busch in 2008.The Belgian-Brazilian hybrid InBev had been known for intense cost cutting, while AnheuserBusch had grown to almost 50% of the U.S. beer market as an innovative company offeringgenerous employee benefits. Each firm’s market strength was largely in regions where theother was not a major competitor.25. This case illustrates an interesting conundrum: Firmsoften merge to combine resources and strengths. The fact that each firm’s successes often donot overlap is often associated with different cultural approaches, which in turn can lead toproblems if the two become one.External growth can take many forms—five of which are discussed next. Although these formsare not always mutually exclusive, it is appropriate to consider each example individually.Horizontal (Related) IntegrationA firm that acquires other companies in the same line of business is engaging in a processcalled horizontal integration. Doing so allows a firm operating in a single industry to growSAGE SAGE BooksContact SAGE Publications at 8 of 42 SAGE Books – Corporate-Level Strategiesrapidly without moving into other industries. Hence, the primary impetus for such a strategy isa desire for increased market share. Such growth can create scale economies for the firm,increase its negotiating leverage with suppliers, and enable the firm to promote its goods andservices to a large audience more efficiently and effectively. Southwest Airlines engaged inhorizontal integration when it acquired AirTran in 2010. As previously mentioned, Airtran’sroutes included a hub in Hartsfield-Jackson Atlanta International Airport—the busiest in theworld—as well as select routes to Mexico and the Caribbean. Historically, Southwestconcentrated on internal growth and has shied away from acquisitions, but the Dallas-baseddiscount carrier saw an opportunity to expand its coverage with the addition of AirTran.26.Horizontal (Related) DiversificationA firm engages in horizontal related diversification when it acquires a business outside itspresent scope of operation but with similar or related core competencies, the firm’s keycapabilities and collective learning skills that are fundamental to its strategy, performance,and long-term profitability. The purpose of horizontal related diversification is to createsynergy by transferring and/or sharing the capabilities among the various business units.Many banks consolidated in the 1990s and 2000s to gain economies of scale.Ideally, core competencies should provide access to a wide array of markets, contributedirectly to the goods and services being produced, and be difficult to imitate. When a firmlacks one or more key core competencies and acquires a business unit that possesses them,these two firms may combine complementary core competencies. For example, when atraditional retailer with a quality reputation acquires an e-tailer with a strong Internet presenceand web savvy, the idea is to combine the two capabilities so that the newly created firm canenjoy the best of both competencies.Conglomerate (Unrelated) DiversificationWhen a corporation acquires a business in an unrelated industry to reduce cyclicalfluctuations in cash flows or revenues, it is pursuing conglomerate (unrelated)diversification.27. Whereas diversifying into related industries is pursued for strategicreasons, diversifying into unrelated industries is primarily financially driven.28. Conglomeratediversification allows a firm to continue to grow even when its core business has matured.However, firm managers often lack the expertise required to manage a myriad of unrelatedbusinesses.Vertical IntegrationVertical integration refers to merging various stages of activities in the distribution channel.Firms in some industries tend to be more vertically integrated than those in other industriesalthough variations can exist among similar firms. Full integration occurs when a firm performsall activities ranging from the procurement of raw materials to the production of final outputs:firms that engage in some but not all of these activities are only partially integrated. A firm thatacquires its suppliers (i.e., expanding “upstream”) is engaging in backward integrationwhereas a firm acquiring its buyers (i.e., expanding “downstream”) is engaging in forwardintegrationVertically integrated firms enjoy a number of advantages. Vertical integration can reduceSAGE SAGE BooksContact SAGE Publications at 9 of 42 SAGE Books – Corporate-Level Strategiestransportation costs, provide more opportunities to differentiate products because of theincreased control over inputs, and provide access to distribution channels that would nototherwise be accessible to the firm. Transactions costs between suppliers and buyers may bereduced when the same firm owns both entities. Proprietary technology can be more easilysecured when information is shared among businesses owned by the same parent firm. It isoften possible to reduce costs by coordinating distribution activities among the business units.It is also easier to develop and maintain high quality when a single firm controls all thebusinesses associated with the production of a good or service.29.Vertical integration also has its disadvantages. It can reduce operational flexibility because thefirm is heavily invested “upstream and downstream.” Vertical integration can even raiseproduction costs and reduce efficiency because of the lack of supplier competition; a firm thatacquires a supplier has committed to using that supplier in the future. Overhead costs mayincrease as the need and ability to coordinate activities among business units increases.Because producers within a vertically integrated firm are committed to working with suppliersowned by the same firm, it must pay higher prices for its inputs if its suppliers are nottechnologically competitive.30.Strategic Alliances (Partnerships)Strategic alliances—often called partnerships—occur when two or more firms agree to sharethe costs, risks, and benefits associated with pursuing new business opportunities. Sucharrangements include joint ventures, franchise/license agreements, joint operations, jointlong-term supplier agreements, marketing agreements, and consortiums. Strategic alliancescan be temporary, disbanding after the project is finished, or can involve multiple projects overan extended period of time. The late 1990s and early 2000s witnessed a sharp increase instrategic alliances.31.Various forms of strategic alliances have become commonplace at both large and small firms.P&G began licensing out hundreds of undeveloped patents, brands, and rights to newproducts in the late 2000s, often partnering with small companies. Nehemiah Manufacturinghas been licensing P&G’s Pampers Kandoo line of toddler cleaning products since 2009.P&G’s Febreze brand of air fresheners for use with residential air-filter products has beenlicensed to Imagine One Resources since 2010. The Febreze brand was licensed to Kaz USAfor an odor-controlling standing fan in 2012. Between 2009 and 2011, P&G-licensed productsgenerated about $3 billion in annual revenues, although the portion returned to the firm asfees is not known.32.Broadly speaking, strategic alliances are considered to be a form of growth, but the firm doesnot necessarily gain revenues and there is no exchange of resources. Although manystrategic alliances may be undertaken for political, economic, or technological reasons, othersmay be pursued as an alternative to diversification. Within this context, one firm may opt towork closely with other firms to pursue various business opportunities instead of attempting toacquire the firms outright. Alternatively, a firm may create greater customer value throughsynergy.33. A particular project may be so large that it would strain a single company’sresources or require complex technology that no single firm possesses. Hence, firms withcomplementary technologies may combine forces, or one firm may contribute its technologicalexpertise while another contributes its managerial or other abilities.34.SAGE SAGE BooksContact SAGE Publications at 10 of 42 SAGE Books – Corporate-Level StrategiesThere are many examples of partnerships, especially where technology and global access arekey considerations. For example, Microsoft and Yahoo formed an Internet search alliance in2010.35. IBM and Apple have exchanged technology in an attempt to develop more effectivecomputer operating systems. General Motors (GM), Lockheed, Southern California Edison,and Pacific Gas & Electric have been working together to develop widely used electricvehicles and advanced mass transportation systems.36.Ford and Toyota announced a strategic alliance in 2011 to develop a gas-electric hybridsystem for light trucks and sport utility vehicles. The rivals are industry leaders in hybridtechnology but came together to share high developmental costs in an effort to achieve theincreased long-term corporate average fuel economy (CAFE) standards.37.A strategic alliance can lead to a merger if additional advantages are anticipated. United andContinental—the second and fourth largest airlines in the United States at the time—discussed a possible merger in 2008 but decided instead on a strategic alliance. As part ofthe arrangement, Continental joined the Star Alliance of 20 airlines anchored by United andLufthansa. The two also agreed on code sharing—marketing a given flight under more thanone airline—to eliminate overlapping flights.38. After enjoying a successful partnership, thetwo finally agreed to merge in 2010.Strategic alliances have two major advantages when compared to mergers and acquisitions.First, they minimize increases in bureaucratic, developmental, and coordination costs whencompared to mergers and acquisitions. Second, each company can share in the benefits ofthe alliance without bearing all the costs and risks itself. The major disadvantage of astrategic alliance is that one partner in the alliance may offer less value to the project thanother partners but may gain a disproportionate amount of critical know-how from thecooperation with its more progressive partners.One of the risks associated with strategic alliances—especially relationships across borders—is that the alliance can equip a global partner to become a global competitor. GM, forexample, has partnered with Shanghai Automotive Industry since 1997. Together, they havebuilt Chevrolets and Cadillacs for China’s burgeoning market as part of a successful 50/50joint venture. GM shared valuable know-how with its Chinese counterpart along the way,however. Some analysts believe GM gave away too much in the deal. The quality of ShanghaiAutomotive’s vehicles have improved considerably as a result of the alliance—so much so thatthe company may be able to compete directly with GM on the world stage, perhaps in theUnited States.39.Strategic alliances can also be problematic if the partner firms do not agree explicitly on thecontribution each will make to the alliance or if one does not meet its commitment. In 2000, forexample, and Toys“R”Us inked a 10-year deal to join forces, with Amazonagreeing to devote a portion of its website to Toys“R”Us products, and the toy retailer agreeingto stock certain items on the virtual shelves. Although the arrangement was touted as anexample of how Internet retailers can work effectively with their traditional counterparts, thedeal deteriorated several years later and ended up in court in 2006. Toys“R”Us argued thatAmazon broke its original commitment to use Toys“R”Us as its sole provider of toys andrelated products, while Amazon contended that Toys“R”Us did not maintain an appropriateselection of toys. A judge sided with Toys“R”Us and ordered the partnership severed in2006.40. Amazon has since begun to market toys on its own and partner with other sellers asSAGE SAGE BooksContact SAGE Publications at 11 of 42 SAGE Books – Corporate-Level Strategieswell.Moral hazard—when the parties in an arrangement do not share equally in the risks andbenefits—can also present a problem for strategic alliances. When cooperating firms do notshare ownership, managers have an incentive to promote activities that provide the greatestpotential benefit for their own firm while shifting costs and risk to the partner firm. Moralhazard is prevalent in everyday life. For example, individuals with low health insurance copayments are more likely to visit the doctor for marginal ailments, thereby shifting some of theunnecessary medical costs to others in the pool. The same principle can be applied toorganizational settings. Firms in a strategic alliance may withhold some of its most advancedtechnology from partners and may not commit its best people to the projects. When thisoccurs, the alliance does not benefit from the best each organization has to offer and is likelyto fail.Stability StrategyAlthough growth is intuitively appealing, it is not always the most effective strategy. Thestability strategy for a firm that has operations in multiple industries maintains the currentarray of businesses for two reasons: First, stability enables the corporation to focusmanagerial efforts on enhancing existing business units by fostering productivity andinnovation. Second, the cost of adding new businesses may exceed the potential benefits. Acorporation may adopt a stability strategy in leaner times and shift to a growth strategy wheneconomic conditions improve. Stability can be an effective strategy for a high-performing firm,but it is not necessarily a risk-averse strategy.For a single industry firm, the stability strategy is one that maintains approximately the sameoperations without pursuing significant growth in revenues or in the size of the organization.Growth may occur naturally but is typically limited to the level of industry growth. Such abusiness may select stability instead of growth for four reasons:First, industry growth may be slow or nonexistent. In this situation, one firm’s internal growthmust come at the expense of another firm. This can be particularly costly, especially whenattacking an industry leader.41.Second, the costs associated with growth do not always exceed the benefits. During the “colawars” of the 1980s, PepsiCo and Coca-Cola spent millions in the United States to lureconsumers to their cola brands only to realize that the costs associated with securing thismarket share severely dampened profits. In the end, Americans could only drink so muchcola, and market shares remained largely unchanged regardless of promotional expenditures.Third, growth may place great constraints on quality, marketing efforts, and customer service.Growth for small firms can create a strategic challenge as managers attempt to retain theflexibility and entrepreneurial spirit that helped found the company while making thesubstantial capital outlays and commitments typically associated with larger firms. Strategicmanagers of such firms are understandably hesitant to adopt growth strategies, even whenfinancial prospects look promising, if they believe that their uniqueness may be lost in thetransition. After going public in 2002, U.S. airline upstart JetBlue surpassed the $1 billionmark in revenues in 2004. By 2011, revenues approached $4 billion, and JetBlue served 70destinations in 22 states and seven countries with about 30,000 employees and 167 planes.But rapid growth has placed considerable strain on JetBlue. In 2007, the fast-growing airlinestranded hundreds of passengers when inexperienced and overwhelmed customer and crewSAGE SAGE BooksContact SAGE Publications at 12 of 42 SAGE Books – Corporate-Level Strategiesservices did not cancel and reschedule flights appropriately during a snowstorm, an error thatcost the company $30 million in payments to customers alone and eventually led to theboard’s removal of founder David Neeleman.42.Agreement is not universal on this point, however. While some leaders acknowledge thedifficulty of maintaining excellent service while growing, they contend that a large firm canmaintain a sense of closeness to its customer with an emphasis on execution. According tochief operating officer (COO) Martin Coles, one of Starbucks’ chief concerns is “staying smallas we grow big.”43. Starbucks maintains its “smallness” by customizing many of its stores totheir locales and emphasizing a personal relationship with each patron.Finally, large, dominant firms may not wish to risk prosecution for monopolistic practices orthe increased competitive pressure associated with growth. U.S. firms, for example, may beprohibited from acquiring competitors if regulators believe their combined market shares willthreaten competitiveness. Even internal growth can be problematic at times, as was the casein the late 1990s and early 2000s with Microsoft’s costly defense against federal charges thatthe company unfairly dictated terms in the software industry. Throughout the 2000s, Intel—supplier of 80% of the world’s microprocessors—was accused of retaliating against computermakers that buy chips from other producers and even paying some of them to boycott Intel’scompetitors. Intel agreed to cease such activities when it reached a settlement with U.S.antitrust regulators in 2010.44.Google has been a target of antitrust allegations because of its massive web influence. In2010, Google announced plans to acquire ITA Software, the flight-data company that supportsflight search services for both Google and its competitors. Following anti-competition protestsby rivals Kayak and Orbitz, and the DOJ, Google agreed to make travel data available to itscompetitors in exchange for DOJ approval of the acquisition. Although Google did notexplicitly commit to link rivals to flight searches, the firm agreed to “build tools that drive moretraffic to airline and online travel agency sites.” In late 2011, Google began placing its newflight search service atop search results for rivals, including Orbitz, Priceline, and Expedia.Consumers selecting the Google tool are linked directly to airline websites, circumventing itsrivals in the process. Google’s competitors petitioned the DOJ for further intervention, claimingthat the Internet giant was wielding its market power in an unfair manner.45.In another 2011 U.S. Senate antitrust hearing, three Internet companies (Nextag, Yelp, andExpedia) charged Google with unfair competition by punishing them with its search engine.These companies also filed complaints with the Federal Trade Commission (FTC), claimingthat Google restricted access to companies whose sites have become places whereconsumers search for information without going to Google first. Nextag chief executive officer(CEO) Jeff Katz argued that Google viewed his firm as a threat and prevented it from biddingon prominent advertisements that appear next to search results for certain products. Googledenied the charges, claiming the restriction was based on the type of advertisement, not theparticular company seeking to purchase it.46.Wal-Mart’s historical emphasis on growth has made it the world’s largest retailer. As such,Wal-Mart is the political target for attacks on American business and must defend itself fromlawsuits and competitive attacks more than any other firm in the world. For example, SaintConsulting Group specializes in fighting proposed Wal-Mart locations behind the scenes.Large supermarket chains including Supervalu and Safeway have secretly funded effortsorchestrated by Saint but ostensibly led by local activists and union groups to derail theSAGE SAGE BooksContact SAGE Publications at 13 of 42 SAGE Books – Corporate-Level Strategiesconstruction of new Wal-Marts on traffic, environmental, and other grounds. In manyinstances, the time it takes to open a new store more than doubles because of such litigation,and in some cases, plans for the proposed Wal-Mart are dropped altogether. Wal-Martreceives this heightened attention because of its dominant industry position.47.Retrenchment StrategiesGrowth and stability strategies are usually adopted when firms are performing well. Whenperformance is disappointing or declines are anticipated, a retrenchment strategy may beappropriate. Retrenchment may take one or a combination of three forms: (1) turnaround, (2)divestment, or (3) liquidation.TurnaroundA turnaround seeks to transform the corporation into a leaner, more effective firm and includessuch actions as eliminating unprofitable outputs, pruning assets, reducing the size of theworkforce, cutting costs of distribution, and reassessing the firm’s product lines and customergroups.48. Broadly speaking, a turnaround is not as drastic a move as restructuring, althoughthe terms are often interchanged in the popular business press.A turnaround typically occurs when a firm performs poorly but anticipating problems andretrenching before problems intensify is advisable. Predicting bad times is not always easy,however, and many executives take their cues from economic forecasts. For example, the firsttwo quarters of 2011 were generally good ones for corporate profits. But faced with theprospects of an extended recession, many firms engaged in turnarounds that included effortsto cut costs, streamline operations, and in some instances close factories and cut theworkforce. These companies hoped to stay ahead of predictions for a continued sluggisheconomy.49.Lee Iacocca’s Chrysler turnaround may be the most famous example in U.S. history. By thelate 1970s, Chrysler was on the verge of bankruptcy. Its newly hired CEO, Lee Iacocca,implemented a dramatic turnaround strategy. A number of employees were laid off, whilethose remaining agreed to forgo part of their salaries and benefits. Twenty plants were eitherclosed or consolidated. Collectively, these actions lowered the firm’s break-even point from anannual sales level in half to about 1.2 million vehicles. It is interesting to note that Iacocca alsoimplemented a divestment strategy (another form of retrenchment) by selling Chrysler’smarine outboard motor, defense, and air-conditioning divisions, as well as all its automobilemanufacturing plants located outside the United States. By 1982, Chrysler began to show aprofit after having lost $3.5 billion in the preceding 4 years. Chrysler performed well for anumber of years but struggled again in 2009 when it was acquired by Fiat.Goodyear was feuding with its unions and struggling to compete with intense foreigncompetition in 2006, but a concentrated turnaround effort proved successful by 2011. The tiremaker shifted to a smaller, more highly skilled workforce and began to focus on selling morepremium, higher-priced tires. As CEO Rich Kramer put it, Goodyear transformed from beingan auto supplier company to being a consumer products company with more emphasis onquality instead of production volume.50.Adidas embarked on a turnaround effort for its Reebok business unit in 2009. For severalSAGE SAGE BooksContact SAGE Publications at 14 of 42 SAGE Books – Corporate-Level Strategiesyears, Reebok’s running shoes had been sold in discount stores and supercenters, resultingin a deterioration of the image. The effort included increased investment in productdevelopment and partnerships with high-stature firms, such as the women’s fitness shoedeveloped with Canadian circus company Cirque du Soleil.51.Facing the prospects of bankruptcy, Blockbuster sought a turnaround in 2010. The firm’svideo rental business model was attacked during the late 2000s by Netflix mail-order andonline rental services, Redbox $1-a-night movie vending machines located in grocery andconvenience stores, and the expansion of pay-per-view movies on cable and satellitetelevision. The turnaround was unsuccessful, however, and the firm entered bankruptcyproceedings and was acquired by Dish Network in 2011.52. Many otherwise strong firmsengage in turnarounds when their environments change. Starbucks closed about 600 storesin 2008 in response to slow industry growth, an impending recession, and increasedcompetition in gourmet coffees from Dunkin’ Donuts and McDonald’s. Starbucks remainedprofitable during this time, however, and maintained more than 17,000 stores in over 50countries in 2011.53.Turnarounds often accompany a change of company leadership. When Akio Toyoda—grandson of Toyota’s founder—took over the company as CEO in 2009, he inherited anunprecedented $4.6 billion loss in the previous fiscal year. Toyoda announced a turnaroundstrategy that included replacing 40% of senior managers and a reorganization of its NorthAmerican business that would unify its sales and manufacturing divisions. In addition, Toyotawelcomed four new executive vice presidents out of a total of five and 18 new managingdirectors out of a total of 50. Toyoda’s new approach marked a key shift from the policies ofhis predecessor, Katsuaki Watanabe, who stepped down to become vice chairman.54.Toyota’s new management team faced its own turnaround scenario in late 2009 and 2010amidst charges of braking problems with the Camry and other models.When a turnaround involves layoffs, firms must be prepared to address their effects on bothdeparting employees and survivors. Employees may be given opportunities to voluntarilyleave—generally with an incentive—to make the process as congenial as possible. When thissituation occurs, however, those departing are often the top performers who are mostmarketable, leaving the firm with a less competitive workforce. When layoffs are simplyannounced, morale is likely to suffer considerably. For this reason, turnarounds involvinglayoffs are often more difficult to implement than anticipated.55.When layoffs are necessary, however, several actions can help to palliate some of thenegative effects. Specifically, top management should communicate honestly and effectivelywith all employees, explaining why the downsizing is necessary and how terminatedemployees were selected. Everyone, including the “survivors,” should be made aware of howdeparting employees will be supported. Employees should also be encouraged to partake ofservices available to them, and special efforts should be made to ensure that such programsare administered in a clear and consistent manner.56. Although these measures will noteliminate all the harsh feelings associated with layoffs, they can help keep the process undercontrol.A number of executives are widely recognized as “turnaround specialists” and may be broughtin as temporary CEOs to lead the process and orchestrate such unpopular strategic moves aslayoffs, budget cuts, and reorganizations. Robert “Steve” Miller, also a major player in theSAGE SAGE BooksContact SAGE Publications at 15 of 42 SAGE Books – Corporate-Level StrategiesChrysler turnaround, has served as CEO of Waste Management and the automobile partssupplier Federal-Mogul, as well as a consultant on turnaround issues to such companies asAetna. According to Miller, the CEO in a company seeking turnaround should be honest withemployees from the outset and seek their input. He or she should also spend time withcustomers. As Miller put it, “Listen to your customers. [They] are usually more perceptive thanyou are about what you need to do with your company.”57.It can be difficult to distinguish between a turnaround strategy and routine continuousimprovement efforts. In 2011, Wal-Mart had experienced seven consecutive quarterly salesdeclines in U.S. stores open for at least a year. Wal-Mart’s U.S. chief William Simon pledged areturn to the core business, an emphasis on households in the $30,000 to $70,000 category.During the recession, many customers in this category defected from the big-box store infavor of upstart dollar store chains.58. Considering only the U.S. market, some might considerthis change of focus to constitute a retrenchment strategy. Given Wal-Mart’s solidperformance outside of the United States, however, others might consider this shift as lesssubstantial. Simon’s efforts produced results, as Wal-Mart achieved a per-store sales growthof 1.3% in the third quarter of 2011.DivestmentIf one or more of the firm’s business units may function more effectively as part of anotherfirm, a divestment strategy may be pursued. Divestment may be necessary when the industryis in decline or when a business unit drains resources from more profitable units, is notperforming well, or is not synergistic with other corporate holdings. In a well-publicized spinoff, PepsiCo divested its KFC, Taco Bell, and Pizza Hut business units into a new company,Tricon Global Restaurants, Inc., in 1997. The spin-off was designed to refocus PepsiCo’sefforts on its beverage and snack food divisions. Tricon’s name officially changed to YumBrands in 2002. Yum added A&W All American Food and Long John Silver’s to the portfolioshortly thereafter and has performed well.In 2010—after the Chrysler acquisition—Italian carmaker Fiat spun off its noncar businesses—Iveco trucks, Case New Holland farming and construction equipment, and industrial andmarine engine division—into a new company, Fiat Industrial. CEO Sergio Marchionne justifiedthe decision by emphasizing the different capital needs and customer and business profiles.“There is no longer any reason to keep together sectors that operate [under] such diverseindustrial logic,” he noted. The goal of the divestiture was to promote “growth, autonomy, andefficiency.”59.LiquidationLiquidation is the strategy of last resort and terminates the business unit by selling its assets.In effect, liquidation represents a divestment of all the firm’s business units and should beadopted only under extreme conditions. Shareholders and creditors experience financiallosses, some of the managers and employees lose their jobs, suppliers lose a customer, andthe community suffers an increase in unemployment and a decrease in tax revenues. For thisreason, liquidation should be pursued only when other forms of retrenchment are not viable(see Case Analysis 6.1).SAGE SAGE BooksContact SAGE Publications at 16 of 42 SAGE Books – Corporate-Level StrategiesStep 9: What Is the Current Firm-Level Strategy?What is the corporate profile? Is the organization attempting to grow, maintain itspresent size (i.e., stability), or retrench? One need not be concerned with what thecompany should be doing at this point but rather what is presently being implemented.It is important to provide sufficient detail to support the assessment of the strategy. Youshould not assume that public references to growth in one specific division or line ofbusiness necessarily mean that a firm is pursuing an overall growth strategy.Boston Consulting Group Growth-Share MatrixIt is often difficult to coordinate the activities of multiple business units, particularly when theyare minimally related or not related at all. Corporate portfolio frameworks have beendeveloped to provide guidelines for strategists. Although firm-specific conditions often requireexceptions to the guidelines, these frameworks can provide a good starting point to considerstrategy in firms with multiple business units. The Boston Consulting Group (BCG) originalframework is one of the most widely recognized.The BCG growth-share matrix was developed in 1967 by BCG and is illustrated by thematrix shown in Figure 6.1. The market’s rate of growth is indicated on the vertical axis, andthe firm’s share of the market is indicated on the horizontal axis. A firm’s business units canbe plotted on the matrix with a circle whose size denotes the relative size of the business unit.The horizontal position of a business indicates its market share, and its vertical positiondepicts the growth rate of the market in which it competes. Managers and consultants cancategorize each business unit as a star, question mark, cash cow, or dog, depending on eachone’s relative market share and the growth rate of its market.60.Figure 6.1 The Original Boston Consulting Group FrameworkA star is a business unit that has a large share of a high-growth market—generally 10% orhigher. Although stars are usually very profitable, they often necessitate considerable cash tocontinue their growth and to fight off the numerous competitors that are attracted to fastgrowing markets. Question marks are business units with low shares of rapidly growingSAGE SAGE BooksContact SAGE Publications at 17 of 42 SAGE Books – Corporate-Level Strategiesmarkets and may be new businesses just entering the market. If they are able to grow anddevelop into market leaders, they evolve into stars; if not, they will likely be divested orliquidated.A cash cow is a business unit that has a large share of a slow-growth market—generally lessthan 10%. Cash cows are normally highly profitable because they often dominate a marketthat does not attract a large number of new entrants. Because they are well established, theyneed not spend vast resources for advertising, product promotions, or consumer rebates. Thefirm may invest the excess cash that they generate in its stars and question marks. Finally,dogs are business units that have small market shares in slow-growth (or even declining)industries. Dogs are generally marginal businesses that incur either losses or small profitsand are often liquidated.Ideally, a well-balanced corporation should have mostly stars and cash cows; some questionmarks (because they can represent the future of the corporation); and few, if any, dogs. Toattain this ideal, corporate-level managers have four options (see Figure 6.2). First, managerscan build market share with stars and question marks. The key for question marks is toidentify and support the promising ones so that they can be transformed into stars. Buildingmarket share may involve significant price reductions, which may result in losses or marginalprofitability in the short run.Figure 6.2 Alternative Strategies With Strategic Business UnitsSecond, management can hold market share with cash cows, thereby generating more cashthan building market share does. Hence, the cash contributed by the cash cows can be usedto support stars and those question marks deemed most promising.Third, management may harvest, or milk, as much short-term cash from a business aspossible, usually while allowing its market share to decline. The cash gained from thisstrategy can also support stars and selected question marks. The businesses harvestedusually include dogs, question marks that demonstrate little growth potential, and some weakcash cows.Finally, management may divest a business unit to provide cash to the corporation and stemthe outflow of cash that would have been spent on the business in the future. As dogs andless promising question marks are divested, the cash provided is reallocated to stars andmore promising question marks.SAGE SAGE BooksContact SAGE Publications at 18 of 42 SAGE Books – Corporate-Level StrategiesAll things equal, healthy multi-business unit firms should maintain a balance of business unitsthat generate cash and those that require funds for growth. Broadly speaking, business unitsbelow the dotted line in Figure 6.1 are revenue generators whereas business units above thedotted line are revenue users. The balance of businesses on both sides of the line can be akey factor in decisions to acquire new business units or divest old ones. When more revenueis needed than can be generated internally, the firm must consider external sources of capital.The BCG matrix heavily emphasizes the importance of market share leadership as a precursorto profitability. Some question marks are cultivated to become leaders as well, but lesspromising question marks and dogs are usually targeted either for harvesting or divestiture.The BCG matrix provides managers with a systematic means of considering the relationshipsamong business units in its portfolio. A number of limitations of this and similar frameworkshave been identified, however. For example, the BCG matrix assumes that strategic managersare free to make portfolio decisions, such as transferring capital from cash cows to questionmarks without challenges from shareholders and others. The classification of business unitsin the matrix can change markedly with different industry definitions. Hence, although theBCG matrix is a useful tool for evaluating the appropriate mix of business units, it should notbe interpreted literally.Global Corporate StrategyA firm may choose to be involved only in its domestic market, or it may compete abroad at oneof three levels: (1) international, (2) multinational, or (3) global. Effective operation at any ofthese levels often—but not always—necessitates economies of scale and a relatively highmarket share.61.SAGE SAGE BooksContact SAGE Publications at 19 of 42 SAGE Books – Corporate-Level StrategiesMoving outside the domestic market, some companies choose to be involved on aninternational basis by operating in various countries but limiting their involvement to importing,exporting, licensing, or making strategic alliances. Exporting alone can significantly benefiteven a small company. However, international joint ventures—a form of strategic allianceinvolving cooperative arrangements between businesses across borders—may be desirableeven when resources for a direct investment are available.Firms with global objectives may decide to invest directly in facilities abroad. Due to thecomplexities associated with establishing operations across borders, strategic alliances maybe particularly attractive to firms seeking to expand their global involvement. Companies oftenpossess market, regulatory, and other knowledge about their domestic markets but may needto “partner” with companies abroad to gain access to this knowledge as it pertains toSAGE SAGE BooksContact SAGE Publications at 20 of 42 SAGE Books – Corporate-Level Strategiesinternational markets. A number of international strategic alliances exist among automobileproducers—for example, production facilities owned jointly by GM and Toyota. Ford andMazda have partnered since 1979; Ford owned 33% of the company in 2008 but reduced itsholdings to only 3% during the global financial crisis in 2010. Ford has shifted its emphasis toChina with a fifth factory in Hangzhou and doubled its production capacity and sales outletsfrom 2012 to 2015. Ford’s aggressive growth in China is part of a joint venture with a Chinesecounterpart, Chongqing Changan Automobile Company.62.International strategic alliances provide a number of advantages to a firm. They can provideentry into a global market, access to the partner’s knowledge about the foreign market, andrisk sharing with the partner firm. They can work effectively when partners can learn fromeach other, when neither partner is large enough to function alone, and when both partnersshare common strategic goals but are not in direct competition. However, a number ofproblems can arise from international joint ventures, including disputes and lack of trust overproprietary knowledge, cultural differences between firms, and disputes over ways to sharethe costs and revenues associated with the partnership.Other conservative options are also available to a firm seeking an international presence.Under an international licensing agreement, a foreign licensee purchases the rights toproduce a company’s products and/or use its technology in the licensee’s country for anegotiated fee structure. This arrangement is common among pharmaceutical firms. Drugproducers in one nation typically allow producers in other nations to produce and market theirproducts abroad.63.International franchising is a longer-term form of licensing in which a local franchisee paysa franchiser in another country for the right to use the franchiser’s brand names, promotions,materials, and procedures.64. Whereas licensing arrangements are predominantly pursuedby manufacturers, franchising is more commonly employed in service industries, such as fastfood restaurants.Other companies are involved at the multinational level, where firms direct investments inother countries, and their subsidiaries operate independently of one another. ColgatePalmolive has attained a large worldwide market share through its decentralized operations ina number of foreign markets.Finally, some firms are globally involved with direct investments and interdependentsubdivisions abroad. For example, some of Caterpillar’s subsidiaries produce components indifferent countries, while other subsidiaries assemble these components and still other unitssell the finished products. As a result, Caterpillar has achieved a low-cost position byproducing its own heavy components for its large global market. If its various subsidiariesoperated independently and produced only for their individual regional markets, Caterpillarwould be unable to realize these vast economies of scale.65.Expanding into global markets is not always easy. Starbucks experienced early difficulties inChina but amassed more than 750 locations in Greater China (i.e., the People’s Republic ofChina, Taiwan, Macao, and Hong Kong) by 2010. McDonald’s opened its first restaurant inChina in 1990 but did not reach 1,000 outlets until 2010; the fast-food giant plans to reach2,000 by 2013. McDonald’s has enjoyed success in Russia where its burgeoning middle classhas a taste for American goods and services. After some initial problems in the 1990s,McDonald’s shifted its emphasis from more stores to larger ones with more efficientSAGE SAGE BooksContact SAGE Publications at 21 of 42 SAGE Books – Corporate-Level Strategiesoperations. Russian locations serve about twice as many customers per year as those in othercountries. The Khamzat Khasbulatov McDonald’s in Moscow is the second busiest in theworld, with 26 cash registers.66.Yum Brands—parent company of KFC and Pizza Hut—has grown at a much faster pace inChina, with about 5,000 stores in 2012, although revenue growth has slowed.67. Yum Brandsalso recently launched an aggressive expansion into India. Yum operated 72 KFCs and 158Pizza Huts in India in 2010, with plans for a total of 1,000 stores by 2015. Restaurant offeringsare similar to those in the United States, except for more vegetarian options and spicierseasoning. By focusing on the youth, Yum CEO David Novak sees the same growth trajectoryin India that has contributed to the success of the company’s 3,500 restaurants in China.68.Growth in China has been a major contributor to Yum’s performance, accounting for 49% ofYum’s total profits in 2010.69. In the emerging economy of Vietnam, however, Yum—likeStarbucks and McDonald’s— has been much more cautious.70.Not all U.S. restaurant chains have been successful in China. California Pizza Kitchenlaunched a franchised unit in 2006 but struggled due to a business model that required theimport of most of its ingredients; the chain is making a second try with a corporate-owned unitopened in 2011. OSI Restaurant Partners operated two Outback Steakhouse restaurants inBeijing but closed both in 2011 for a lack of customers.71.In 2010, Yum Brands began to focus on Africa, announcing plans to double its number ofKFC outlets there to 1,200 by 2014. Novak cited the continent’s large population, improvedpolitical stability, growing middle class, and cultural preference for chicken as reasons for thestrategic interest. Although an estimated 6l% of its residents currently live on less than $2 perday, Africa’s middle class—those earning between $4 and $20 a day—is projected to increaseto 1.1 billion, or 42% of the continent’s population, by 2060. KFC estimates that it reachedonly about 180 million of Africa’s roughly 1 billion people in 2010, while holding a sizable 44%share of the fast-food market in South Africa.72.Coca-Cola is already well established in Africa, with 3,200 distribution points delivering toshops of all sizes in 15 African nations. Nestle is currently following Coke’s lead, investing$850 million in Africa between 2006 and 2010. Executives expect the percentage of firmrevenues derived from emerging markets to increase from 30% to 45% by 2020 with Africaaccounting for a significant part of the growth.73.German supermarket Aldi has experienced considerable growth in the United States andplans continued expansion into the 2010s. Aldi emphasizes small stores, store brands, andlow prices, a combination that bodes well in down economic times.74. German carmakerVolkswagen (VW) has also targeted the United States for growth. With only 2.2% of the in 2010, VW is making a renewed effort to tailor its vehicles to mainstream Americantastes. VW’s strategy includes a larger, less expensive Jetta and the production of vehicles inthe United States beginning in 2011, the first since the 1980s.75.A number of firms—including Ford Motor, Honda (motorcycles), and H.J. Heinz—haveexpanded aggressively into Indonesia. With 240 million people, Indonesia experiencedsignificant economic growth and development in the late 2000s and has become a destinationof choice for many manufacturers of Western products seeking global growthSAGE SAGE BooksContact SAGE Publications at 22 of 42 SAGE Books – Corporate-Level Strategiesopportunities.76. Annual car sales increased 58% in Indonesia in 2010, compared to 33% inChina and 4% in the United States.77.Many of the successful ventures into emerging markets— including much of South America,Africa, and Asia—are driven by inexpensive labor and the distribution of low-cost products.There are exceptions to this general rule, however. While Indian automaker Tata seeks toexport its inexpensive vehicles to consumers in other nations, global ultra-luxury automakersare aggressively pursuing a growing high-end market in India. The nation may be home tohalf a billion of the world’s poorest citizens, but its small high-wealth class is growing. Only15,702 luxury cars were sold in India in 2010, compared to 727,227 in China. The discrepancyis due in part to India’s import taxes on vehicles and the nation’s poor highway infrastructure,but demand is growing.78.Some of the complexities associated with adopting a global perspective are illustrated byKellogg’s production dilemma. Some countries appreciate the vitamin fortification in CornFlakes common in Kellogg’s host country, the United States. Denmark, however, does notwant vitamins added to cereal for fear that some might exceed recommended daily doses.Officials in the Netherlands do not believe Vitamin D or folic acid is beneficial, but the Finnslike more Vitamin D to make up for sun deprivation. As a result, Kellogg’s plants in Englandand Germany have produced four different varieties of Corn Flakes since 1997 to meet thedifferences in demand throughout the European Union.79.Wal-Mart AbroadWal-Mart has also experienced both successes and difficulties in global markets and is aninteresting case to consider. When the giant retailer first expanded outside of the UnitedStates in the early 1990s, it made a number of mistakes by presuming that its successfulAmerican model would succeed in disparate global markets. Golf clubs in Brazil and iceskates in Mexico were among the early casualties, and some German customers mistook theSAGE SAGE BooksContact SAGE Publications at 23 of 42 SAGE Books – Corporate-Level Strategiesfriendliness of its clerks for flirting. In the early and mid-2000s, Wal-Mart changed course,expanding by acquiring successful local retail chains, hiring locals to manage them, andlearning the local tastes and culture. Wal-Mart’s acquisitions of grocer Asda in the UnitedKingdom and retailer Cifra SA in Mexico have given the firm strong stakes in two nationswithout expanding its operations internally.80. Expansion into Japan has been one of externalgrowth, where Wal-Mart owns 95% of supermarket Seiyu.81. The mega-retailer has grownrapidly and enjoyed considerable success in developing markets such as Mexico where rapidly and enjoyed considerable success in developing markets such as Mexico where“shoppers care more about the cost of medicine and microwaves than the cultural incursionsof a multinational corporation.”82.Wal-Mart has expanded aggressively into Canada, where it operated about 330 stores in early2012, about half of them supercenters. Not to be outdone, rival Target acquired 200 storesfrom Canadian discount retailer Sellers. Viewing the U.S. discount retail market asincreasingly saturated, Wal-Mart and its rivals are continuing to shift their attention elsewhere.With its cultural similarities and proximity to the United States, Canada is a logical choice.83.Wal-Mart was never able to win over Germany’s frugal and demanding customers from thecountry’s strong local discount retailers. After losing money for 8 years, Wal-Mart sold its 85stores to German rival Metro AG. Interestingly, the firm’s largest global competitor, Carrefour,seemed to know better all along. Carrefour had operations in 29 countries when Wal-Martdecided to leave Germany altogether in 2006, but the number two global retailer never hadstores in Germany84.Wal-Mart opened its first big-box store in India in 2009. Government restrictions required WalMart to secure a local joint venture partner—Bharti Enterprises—and precluded direct sales tothe public, however. Under the name Best Price Modern Wholesale, the Wal-Mart store inAmritsar operates on a cash-and-carry basis, selling 10,000 products to licensed storeowners, schools, hospitals, and other institutions.85.In 2011, Wal-Mart acquired South African retailer Massmart Holdings, a firm with 290 storesoperating in 13 African nations.86. According to Andy Bond, the Wal-Mart executive who ledthe negotiations, “We like South Africa. I think there’s a definite confidence in it as a trueemerging economy, and it also offers a platform for growth in southern Africa.”87. Theacquisition was met with political and regulatory resistance, however. The South Africangovernment warned that it could result in job losses, a charge echoed by various local unionsbut denied by both Wal-Mart and Massmart.88. The takeover was approved on conditions thatWal-Mart halt job cuts for 2 years, honor union bargaining agreements for 3 years, and invest$14.4 million in a supply-chain training program designed to improve local industrycompetitiveness.89.Wal-Mart has faced other challenges in China where the retailer has 189 units in 2011. WalMart has sought to reach rural and lower-income Chinese consumers by launching a newcompact hypermarket format based on the low-cost, no frills Bodega Aurrera stores in Mexicoand Changomas stores in Argentina. The 37,000 square-foot stores often have concretefloors, brick walls, and no air-conditioning. Their smaller size is more in line with Chinesepreferences for small stores and enables Wal-Mart to penetrate smaller markets. The compacthypermarket is expected to become the preferred retail model for Wal-Mart in emergingeconomies, where the big-box store is experiencing the fastest growth.90.SAGE SAGE BooksContact SAGE Publications at 24 of 42 SAGE Books – Corporate-Level Strategies1. acquired Danish Netto’s 193 stores in the United Kingdom in 2010. Netto storeswere relatively small and located in urban centers, complementing Wal-Mart’s cadre of largerout-of-town supercenters. Netto represented Wal-Mart’s first European acquisition since1998.91.Wal-Mart’s aggressive global orientation was countered when British supermarket Tescoopened 199 Fresh & Easy stores in the United States between 2007 and 2011. Tesco has asuccessful track record growing from 758 stores in six countries in 1997 to 6,351 stores in 14countries in 2012, but two-thirds of its revenues still come from the United Kingdom. Itsemphasis on high quality was greeted by a steep recession in the United States, however,prompting Tesco to cut prices, increase advertising, and develop a new budget brand. Itsmarket share in the United Kingdom grew to over 30% by 2010 but slipped in 2011. In late2012 CEO Philip Clarke decided to close or sell all of Tesco’s stores in the United States andrefocus efforts on markets in the United Kingdom and other countries. Like Wal-Mart, Tescoillustrates the challenges that must be faced when a successful firm attempts to replicate itssuccess abroad.92.Global Orientation AssessmentFirms change from domestic-oriented strategies to a global orientation for numerous reasons.Pursuing global markets can reduce per-unit production costs by increasing volume. A globalstrategy can extend the product life cycle of products whose domestic markets may bedeclining— as U.S. cigarette manufacturers did in the 1990s. Establishing facilities abroadcan also help a firm benefit from cost differences associated with comparative advantage,which partially explains why athletic shoes tend to be produced most efficiently in parts ofAsia where rubber is plentiful and labor is less costly. A global orientation can lessen riskbecause demand and competitive factors tend to vary among nations. There are a number offactors to consider, however:Are customer needs abroad similar to those in the firm’s domestic market? If so, thefirm may be able to develop economies of scale by producing a higher volume of thesame goods or services for both markets.Are differences in transportation and other costs abroad favorable and conducive toproducing goods and services abroad? Are these differences favorable and conduciveto exporting or importing goods from one country to another?Are the firm’s customers or partners already involved in global business? If so, the firmmay need to become equally involved.Will distributing goods and services abroad be difficult? If competitors already controldistribution channels in another country, expansion into that country will be difficult.Will government trade policies facilitate or hinder global expansion? For example, theNorth American Free Trade Agreement (NAFTA) facilitates trade among firms in theUnited States, Canada, and Mexico. Similar trading blocks, such as the EuropeanEconomic Union (EEU), occur in other parts of the world.Will managers in one country be able to learn from managers in other countries? If so,global expansion may improve efficiency and effectiveness, both abroad and in the hostcountry.Corporate growth is often pursued through expansion into emerging economies—thosenations that have achieved enough development to warrant expansion but whose markets arenot yet fully served. In 2010, M&A activity in emerging markets outpaced that in Europe for theSAGE SAGE BooksContact SAGE Publications at 25 of 42 SAGE Books – Corporate-Level Strategiesfirst time.93. Although emerging economies such as China, South Africa, Mexico, and parts ofEastern Europe are attractive in many respects, poor infrastructure (e.g., telecommunications,highways), cumbersome government regulations, and/or a poorly trained workforce can creategreat challenges for the firm considering expansion. The advantages and disadvantages ofgrowth through global expansion should be considered carefully before pursuing expansioninto an emerging market.SummaryTwo key sets of strategic decisions must be made at the corporate level. First, top executivesmust identify the corporate profile and determine whether the firm will operate in a singlebusiness, in more than one related business, or in more than one unrelated business. Thereare benefits and shortcomings associated with each profile option.Second, strategic managers must select a corporate strategy from among three basic choices:(1) growth, (2) stability, or (3) retrenchment. A number of additional alternatives associatedwith growth and retrenchment strategies must also be addressed. A firm may choose a formof corporate restructuring to support strategic attempts to revive its competitiveness andperformance.Portfolio frameworks such as the BCG growth-share matrix can assist corporate executives inmanaging the relationships among the firm’s business units. In doing so, executives mustdetermine the extent to which the firm will involve itself in business operations.Global concerns represent a key consideration at the corporate strategy level. There are threebroad options ranging from conservative to aggressive, each with advantages anddisadvantages, depending on the level of international involvement desired.Key TermsAcquisition: A form of a merger whereby one firm purchases another, often with acombination of cash and stock.Backward Integration: A firm’s acquisition of its suppliers.BCG Growth-Share Matrix: A corporate portfolio framework developed by the BostonConsulting Group that categorizes a firm’s business units by the market share that theyhold and the growth rate of their respective markets.Conglomerate (Unrelated) Diversification: A form of diversification in which a firmacquires a business to reduce cyclical fluctuations in cash flows or revenues.Core Competencies: The firm’s key capabilities and collective learning skills that arefundamental to its strategy, performance, and long-term profitability.Corporate Profile: Identification of the industry or industries in which a firm operates.Corporate-Level Strategy: The strategy that top management formulates for the overallcompany.Divestment: A corporate-level retrenchment strategy in which a firm sells one or more ofits business units.External Growth: A corporate-level growth strategy whereby a firm acquires othercompanies.Forward Integration: A firm’s acquisition of one or more of its buyers.Growth Strategy: A corporate-level strategy designed to increase revenues, andSAGE SAGE BooksContact SAGE Publications at 26 of 42 SAGE Books – Corporate-Level Strategies1. profits and/or market share.Horizontal Integration: A form of acquisition in which a firm expands by acquiring othercompanies in its same line of business.Horizontal Related Diversification: A form of diversification in which a firm acquires abusiness outside its present scope of operation but with similar or related corecompetencies.Internal Growth: A corporate-level growth strategy in which a firm expands by internallyincreasing its size and sales rather than by acquiring other companies.International Franchising: A form of licensing in which a local franchisee pays afranchiser in another country for the right to use the franchiser’s brand names,promotions, materials, and procedures.International Licensing: An arrangement whereby a foreign licensee purchases therights to produce a company’s products and/or use its technology in the licensee’scountry for a negotiated fee structure.Liquidation: A corporate-level retrenchment strategy in which a firm terminates one ormore of its business units by the sale of their assets.Merger: A corporate-level growth strategy in which a firm combines with another firmthrough an exchange of stock.Retrenchment Strategy: A corporate-level strategy designed to reduce the size of thefirm.Stability Strategy: A corporate-level strategy intended to maintain a firm’s present sizeand current lines of business.Strategic Alliances: A corporate-level growth strategy in which two or more firms agree toshare the costs, risks, and benefits associated with pursuing new business opportunities.Strategic alliances are often referred to as partnerships.Synergy: When the combination of two firms results in higher efficiency and effectivenessthan would otherwise be achieved by the two firms separately.Turnaround: A corporate-level retrenchment strategy intended to transform the firm into aleaner and more effective business by reducing costs and rethinking the firm’s productlines and target markets.Vertical Integration: A form of integration in which a firm expands by acquiring acompany in the distribution channel.Review Questions and ExercisesWhat are the advantages and disadvantages of internal growth as opposed to growththrough mergers and acquisitions?Why would management adopt a stability strategy? Can stability strategies be viableover a lengthy period of time? Why or why not?When is a retrenchment strategy appropriate? What criteria can help determine whatparticular retrenchment strategy should be used?How should the BCG matrix be applied? Are such portfolios always useful to corporateexecutives?What are the advantages and disadvantages associated with corporations operating incentralized or decentralized fashions?What factors should a firm’s managers consider when determining the degree ofinternational involvement appropriate for the organization?Practice QuizSAGE SAGE BooksContact SAGE Publications at 27 of 42 SAGE Books – Corporate-Level StrategiesA.B.C.D.A.B.C.D.A.B.C.D.A.B.C.D.True or False?1. Because firms operating in single industries are more susceptible to industrydownturns, most firms eventually diversify into other industries.2. The growth strategy is always the most effective strategy for a healthy firm.3. Synergy occurs when the combination of two organizations results in highereffectiveness and efficiency than would otherwise be generated by them separately.4. Strategic alliances typically involve higher bureaucratic and developmental costs whencompared to mergers and acquisitions.5. Corporate restructuring involves the acquisition of business units unrelated to the firm’score business unit.6. The BCG matrix provides managers with a systematic means of determining whether agrowth, stability, or retrenchment strategy should be adopted.Multiple Choice7.Diversification allows a firm to________.concentrate its efforts on a single businessuse its resources more effectivelycreate excess resourcesall of the above8.A firm seeking rapid growth should pursue________.internal growthexternal growthdivestment of poor performing businessesa restructuring strategy9.When a firm purchases both its suppliers and buyers, it is engaging in________.forward integrationbackward integrationboth forward and backward integrationnone of the above10.Which of the following is not a potential reason for selecting a stability strategy?The industry is not growing.Growth may place constraints on customer service.Costs associated with growth exceed its benefits.The stability inherently reduces risk.11.Firms operating on an international basis limit their activities to________.SAGE SAGE BooksContact SAGE Publications at 28 of 42 SAGE Books – Corporate-Level StrategiesA.B.C.D.A.B.C.D.importing and exportinglicensingstrategic alliancesall of the above12.Which of the following is not an advantage of international joint ventures?Access to knowledge about a foreign market is given.Ability to eliminate risk associated with global expansion is obtained.Firms can learn from each other.Entry into the foreign market is secured.Student Study SiteVisit the student study site at to access these additionalmaterials:Answers to Chapter 6 practice quiz questionsWeb quizzesSAGE journal articlesWeb resourceseFlashcardsNotes1. M. Lubatkin and S. Chatterjee, “Extending Modern Portfolio Theory into the Domain ofCorporate Diversification: Does It Apply?” Academy of Management Journal 37 (1994): 109-136.2. S. Misquitta and C. Rohwedder, “Kraft Covets Cadbury’s Know-How in India,” Wall StreetJournal, September 10, 2009, B1.3. M. Karnitschnig, “After Years of Pushing Synergy, Time Warner Says Enough,” Wall StreetJournal Online, June 2, 2006.4. S. Ovide and E. Steel, “It’s Now Official: AOL, Time Warner to Split,” Wall Street Journal,May 29, 2009, B1.5. E. Byron, “Merger Challenge: Unite Toothbrush, Toothpaste,” Wall Street Journal, April 24,2007, A1, A17.6. J. Covert, “CVS Shareholders Approve Chain’s Offer for Caremark,” Wall Street JournalInteractive Edition, March 15, 2007.7. S. Gray, “Natural Competitor,” Wall Street Journal, December 4, 2006, B1.8. A. Merrick, “How Walgreen Changed Its Prescription for Growth,” Wall Street Journal,March 19, 2008, B1.9. S. E. Needleman, “Restaurant Franchises Try Truckin’ as a Way to Grow,” Wall StreetSAGE SAGE BooksContact SAGE Publications at 29 of 42 SAGE Books – Corporate-Level StrategiesJournal, October 28, 2010, B1, B7.10. A. Gasparro and M. Warner, “McDonald’s Sells, 24/7,” Wall Street Journal, December 9,2011, B2.11. J. Jargon, “Wendy’s Stages in Palace Coup,” Wall Street Journal, December 21, 2011, B1,B2.12. Ibid.13. L. Saigol and M. Johnson, “M&A Hit by Fall in Confidence,” Financial Times, October 18,2010, 15.14. J. Adamy, M. Karnitschnig, and J. Jargon, “Mars’s Takeover of Wrigley Creates GlobalPowerhouse,” Wall Street Journal, April 29, 2008, A.15. G. Chazan, D. Cimilluca, and B. McKay, “Pepsi Juices Up in Russia,” Wall Street Journal,December 3, 2010, B1-B2.16. T. W. Martin, “Southwest Eager for a Seat in Atlanta,” Wall Street Journal, May 10, 2011.17. J. Adamy, “After Two Years, Peltz Finally Makes a Deal for Wendy’s,” Wall Street Journal,April 29, 2008, B1.18. J. Jargon and A. Gasparro, “Wendy’s Parts With Arby’s,” Wall Street Journal, June 14,2011, B8.19. M. Bustillo, “Sears Suffers as It Skimps on Stores,” Wall Street Journal, November 17,2011, B1, B7; A. Merrick and D. K. Berman, “Kmart to Buy Sears for $11.5 Billion,” Wall StreetJournal, November 18, 2004, A1, A8.20. M. Bustillo and A. Zimmerman, “Holiday Sales Woes Cause Cloud Over Sears,” WallStreet Journal, December 28, 2011, A1, A2; M. Bustillo and D. Mattioli, “In Retreat, Sears Setto Unload Stores,” Wall Street Journal, February 24, 2012, A1,A2.21. A. Troianovski, “AT&T Hangs Up on T-Mobile,” Wall Street Journal, December 20, 2011,A1, A2.22. M. Karnitschnig, “After Years of Purshing Synergy.”23. M. A. Hitt, J. S. Harrison, and R. D. Ireland, Mergers and Acquisitions: A Guide to CreatingValue for Stakeholders (New York: Oxford University Press, 2001).24. N. E. Boudette, “At DaimlerChrysler, a New Push To Make Its Units Work Together,” WallStreet Journal, March 12, 2003, A1, A15; J. R. Healey, S. S. Carty, C. Woodyard, and M.Krantz, “Unprecedented Auto Deal,” USA Today, May 15, 2007, B1,B2.25. M. Karnitschnig and D. Kesmodel, “InBev Mulls Bid for Rival Anheuser,” Wall StreetJournal, May 24, 2008, A1; J. Foley, U. Galani, and I. Campbell, “InBev, Anheuser-Busch Offera Tale of Two Different Cultures,” Wall Street Journal Online, M a y 2 8 , 2 0 0 8 . (accessed May 29, 2008).SAGE SAGE BooksContact SAGE Publications at 30 of 42 SAGE Books – Corporate-Level Strategies26. M. Esterl, “Discount Carriers Southwest, AirTran Tie Knot,” Wall Street Journal, September28, 2010, B1.27. M. S. Salter and W. S. Weinhold, “Diversification Via Acquisition: Creating Value,” HarvardBusiness Review 56, no. 4 (1978): 166-176.28. L. E. Palich, L. B. Cardinal, and C. C. Miller, “Curvilinearity in the DiversificationPerformance Linkage: An Examination of Over Three Decades of Research,” StrategicManagement Journal 21 (2000): 155-174.29. S. Bhuyan, “Impact of Vertical Mergers on Industry Profitability: An Empirical Evaluation,”Review of Industrial Organization 20 (2002): 61-78.30. R. D. Buzzell, “Is Vertical Integration Profitable?” Harvard Business Review 61, no. 1(1994): 92-102.31. J. J. Reuer, M. Zollo, and H. Singh, “Post-Formation Dynamics in Strategic Alliances,”Strategic Management Journal 23 (2002): 135-152.32. E. Glazer, “P&G’s $3 Billion Sideline,” Wall Street Journal, March 20, 2012, B1, B2.33. B. N. Anand and T. Khanna, “Do Firms Learn to Create Value? The Case of Alliances,”Strategic Management Journal 21 (2000): 295-315.34. T. E. Stuart, “Interorganizational Alliances and the Performance of Firms: A Study ofGrowth and Innovation Rates in a High-Technology Industry,” Strategic Management Journal21 (2000): 791-811.35. J. Menn and N. Tait, “Microsoft Alliance with Yahoo is Approved,” Financial Times,February 19, 2010, 13.36. P. Wright, M. Kroll, and J. A. Parnell, Strategic Management: Concepts (Upper SaddleRiver, NJ: Prentice Hall, 1998).37. J. Bennett and M. Ramsey, “Putting Egos Aside, Ford, Toyota Pair Up for Hybrids,” WallStreet Journal, August 23, 2011, B1, B2.38. S. Carey, “UAL and Continental Pair, but Won’t Merge,” Wall Street Journal, June 20,2008, B1.39. G. Fairclough, “GM’s Chinese Partner Looms as a New Rival,” Wall Street Journal, April20, 2007, A1, A8.40. M. Mangalindan, “How Amazon’s Dream Alliance with Toys ‘R’ Us Went So Sour,” WallStreet Journal, January 23, 2006, A1,A12.41. K. G. Smith, W. J. Ferrier, and C. M. Grimm, “King of the Hill: Dethroning the IndustryLeader,” Academy of Management Executive 15, no. 2 (2001): 59-70.42. S. Carey, “Amid JetBlue’s Rapid Ascent, CEO Adopts Big Rivals’ Traits,” Wall StreetJournal, August 25, 2005, A1, A6; J. Lipton, “Storm Worries Ground JetBlue,” Forbes OnlineEdition, March 16, 2007; S. Carey and P. Prada, “Course Change: Why JetBlue Shuffled TopSAGE SAGE BooksContact SAGE Publications at 31 of 42 SAGE Books – Corporate-Level StrategiesRank,” Wall Street Journal, May 11, 2007, B1,B2.43. M. Coles, “Starbucks Business Paradigm: Doing Well While Doing Good,” Keynoteaddress at the Annual Conference of the Strategic Management Society, October 15, 2007,San Diego, CA.44. D. Clark and T. Catan, “Intel Slapped in Antitrust Case,” Wall Street Journal, August 5,2010, B1, B2.45. J. Nicas, “Google Roils Travel,” Wall Street Journal, December 27, 2011, A1, A2.46. A. Efrati and T. Catan, “Google Rivals Are Readying an Antritrust Assault in D.C.,” WallStreet Journal, September 21, 2011, B1, B8.47. A. Zimmerman, “Rival Chains Secretly Fund Opposition to Wal-Mart,” Wall Street Journal,June 7, 2010, A1, A16.48. See M. Garry, “A&P Strikes Back,” Progressive Grocer, February 1994, 32-38.49. K. Linebaugh, “Lean Companies Ready to Cut,” Wall Street Journal, October 24, 2011,B1, B2.50. J. Bennett, “Goodyear Rides Again,” Wall Street Journal, September 15, 2011, B1, B2.51. D Shafer, “Reebok’s Big Ambition to Leap Past Puma,” Financial Times, June 16, 2009,16.52. M. Spector, “Blockbuster Plots a Remake,” Wall Street Journal, February 24, 2010, B1.53. J. Adamy and A. Prior, “Anxiety Grows Around Starbucks Closings,” Wall Street Journal,July 9, 2008, B3; J. Adamy, “Starbucks Moves to Cut Costs, Retain Customers,” Wall StreetJournal, December 5, 2008, B1.54. J. Soble and J. Reed, “Toyota to Sweep Away Old Guard in Overhaul,” Financial Times,May 15, 2009, 15.55. M. Murray, “Waiting for the Ax to Fall,” Wall Street Journal, March 13, 2001, B1, B10.56. Purchasing, “Some Specifics on How to Handle Layoffs,” December 16, 1999, 70.57. J. S. Lublin, “Tips from a Turnaround Specialist,” Wall Street Journal, December 27, 2000,B1.58. M. Bustillo, “With Sales Flabby, Wal-Mart Turns to Its Core,” Wall Street Journal, March21, 2011, B1, B8.59. J. Reed and G. Dinmore, “Fiat to Spin Off Non-Car Divisions,” Financial Times, April 22,2010, 15.60. B. Hedley, “Strategy and the Business Portfolio,” Long Range Planning, 10, no. 2 (1977):9-14.61. J. M. Geringer, S. Tallman, and D. M. Olsen, “Product and International DiversificationSAGE SAGE BooksContact SAGE Publications at 32 of 42 SAGE Books – Corporate-Level StrategiesAmong Japanese Multinational Firms,” Strategic Management Journal 21 (2000): 51-80.62. J. Soble and J. Reed, “Ford to End Mazda Alliance as it Sharpens Focus on CoreBrands,” Financial Times, October 19, 2010, 15; S. Terlep and M. Ramsey, “Ford Bets $5Billion on Made in China,” Wall Street Journal, April 20, 2012, B1, B2.63. H. Merchant and D. Schendel, “How Do International Joint Ventures Create ShareholderValue?” Strategic Management Journal 21 (2000): 723-737; T. L. Powers and R. C. Jones,“Strategic Combinations and Their Evolution in the Global Marketplace,” ThunderbirdInternational Business Review 43 (2001): 525-534.64. P. Chan and R. Justis, “Franchise Management in East Asia,” Academy of ManagementExecutive 4 (1990): 75-85.65. P Wright et al., Strategic Management.66. J. Adamy, “As Burgers Boom in Russia, McDonald’s Touts Discipline,” Wall Street Journal,October 16, 2007, A1.67. F. Yan and T. Jones, “McDonald’s to Double China Restaurants by 2013,” Reuters,D e c e m b e r 1 5 , 2 0 1 0 , (accessed October 17, 2011); L. Burkitt, “China Loses Its Taste forYum,” Wall Street Journal, December 3, 2012, p. B9.68. J. Jargon and A. Chang, “Yum Brands Bets on India’s Young for Growth,” Wall StreetJournal, December 17, 2009, B1.69. J. E. Solsman, “China Lifts Yum Brands’ Profits,” Wall Street Journal, October 6, 2010,B8.70. J. Hookway, “In Vietnam, Fast Food Acts Global, Tastes Local,” Wall Street Journal, March12, 2008, B1.71. L. Burkitt, “A Secret Recipe in China,” Wall Street Journal, October 25, 2011, B1-B2.72. J. Jargon, “KFC Savors Potential in Africa,” Wall Street Journal, December 8, 2010, B1,B2; D. Maylie, “By Foot, by Bike, by Taxi, Nestle Expands in Africa,” Wall Street Journal,December 1, 2011, B1, B16.73. D. Maylie, “By Foot, by Bike, by Taxi.”74. C. Rohwedder and D. Kesmodel, “Aldi Looks to U.S. for Growth,” Wall Street Journal,January 13, 2009, B1.75. V. Fuhrmans, “Volkswagen Aims at Fast Lane in U.S.” Wall Street Journal, October 5,2010, A1, A20.76. P. Barta, “Brands Bet on Indonesia as Spending Booms,” Wall Street Journal, April 8,2010, B1, B2.77. R. Kapadia, “Redrawing the Map of the World,” Smart Money, December 2011, 58-62.SAGE SAGE BooksContact SAGE Publications at 33 of 42 SAGE Books – Corporate-Level Strategies78. J. Fontanella-Khan, “Luxury Carmakers Eye India’s Super-Rich,” Financial Times, April 18,2011, 18.79. T. Sims, “Corn Flakes Clash Shows the Glitches in European Union,” Wall Street Journal,November 1, 2005, A1, A9.80. G. Samor, C. Rohwedder, and A. Zimmerman, “Innocents Abroad?” Wall Street JournalOnline, May 16, 2006.81. K. Maxwell, “Wal-Mart Boosts Stake in Japan’s Seiyu to 95%,” Wall Street Journal,December 5, 2007, A1.82. J. Lyons, “In Mexico, Wal-Mart Is Defying Its Critics,” Wall Street Journal, March 5, 2007,A1.83. S. Weinberg and P. Dvorak, “Wal-Mart’s New Hot Spot: Canada,” Wall Street Journal,January 27, 2011, B3.84. A. Zimmerman and E. Nelson, “With Profits Elusive, Wal-Mart to Exit Germany,” WallStreet Journal, July 29, 2006, A1.85. E. Bellman, “Wal-Mart Exports Big-Box Concept to India,” Wall Street Journal, May 28,2009, B1.86. M. Bustillo, R. M. Stewart, and P. Sonne, “Wal-Mart Targets Africa,” Wall Street Journal,September 28, 2010, B1, B2.87. J. Birchall, “Walmart Throws Down $4bl Gauntlet in South Africa,” Financial Times,September 28, 2010, 17.88. D. Maylie, “Wal-Mart’s Africa Foothold Shaky as Job Worries Mount,” Wall Street Journal,May 10, 2011, B1-B2.89. D. Maylie, “Wal-Mart Gets Nod in Africa,” Wall Street Journal, June 1, 2011, B9.90. J. Birchall, “Walmart Slims Down for China,” Financial Times, December 2, 2010, 17-20.91. C. Rohwedder, “Wal-Mart U.K. Deal Fits Goal: Go Small,” Wall Street Journal, May 28,2010, B1, B7.92. C. Rohwedder, “Tesco Tries to Hit a U.S. Curveball,” Wall Street Journal, March 2, 2009,B1; P. Sonne, “Tesco’s CEO-to-Be Unfolds Map for Global Expansion,” Wall Street Journal,June 9, 2010, B1, B2; P. Evans, “Tesco Overhauls Its Strategy,” Wall Street Journal, April 16,2012, B3; P. Sonne, and P. Evans, “Five Years, $1.6 Billion Later, Tesco Decides to Quit U.S.,”Wall Street Journal, December 6, 2012, pp. B1, B4.93. L. Saigol and H. Thomas, “Emerging Markets M&A Outstrips Europe,” Wall Street Journal,September 20, 2010, 14-15.SAGE SAGE BooksContact SAGE Publications at 34 of 42 SAGE Books – Corporate-Level StrategiesStrategy + Business Reading: The Unique AdvantageTo succeed in a mature industry like consumer products, the trick isn’tbeing first—it’s being hard to Alexander Kandybin and Surbhee GroverMars Inc. faced a challenge that was anything but sweet. Founded more than acentury ago in a kitchen in Tacoma, Wash., the chocolate giant seemed to have lost itsWilly Wonka-like touch. It was the 1990s, and consumers were beginning to questionthe wisdom of a diet high in candy bars and other sources of sugar, and were gettinginterested in nutrient-added alternatives such as energy bars. Sales growth slippedinto the single digits for the first time in the company’s history.But introducing major new products wasn’t easy for Mars. The company had had ahard time launching even minor additions to its Snickers, M&M’s, Starburst, and othercore lines. Its R&D culture was geared to “making no mistakes,” as one insider put it.And any idea that managed to slip through that filter was subjected to consumer testsand panels that took years, cost millions of dollars, and tended to weed out anythingbold and different. The result? The 1990s came and went without a significantsuccessful launch in Mars’s snack food lines. Its core categories of confectionary andpet foods were getting long in the tooth, and analysts wondered aloud if the privatelyheld firm’s best days were behind it.This is an all-too-common story in mature, slow-growth industries such as food andconsumer products. Companies in these industries often spend relatively little on R&D,and in many cases their innovation results are marginal. An analysis of productsintroduced in the food and beverage industry in 2005-06 showed that just one in fivenew products earned more than US$7.5 million during its first year.Why do mature businesses struggle with innovation? Much of the problem can betraced to conventional wisdom, which goes something like this: The secret to growth inthe consumer goods arena is to develop new products based on consumer needs,which are discovered through consumer research and focus groups. And what if a newidea is not great? No big deal. Marketing and advertising can always step in, turning aso-so concept into a hit. And the first to market, goes the reasoning, will capture mostof the profits. This kind of thinking leads to innovation cultures that deliberatelydevelop a long list of line extensions—new flavors of an established soda brand, say—rather than the kind of game-changing innovations that can make a real difference tothe bottom line.There is an alternative, one that can help rejuvenate a tired portfolio or a worn-outbrand in a slow-growing industry. Rather than thinking about new products as a way toget customers excited for a little while, companies need to think about their innovationstrategy as a way to build a high, hard wall between those customers and theirstrongest competitors. This means shifting some investment away from marketing andadvertising toward the development of different kinds of new products. The mostimportant thing about these game-changing new products is that they be difficult tocopy. Meeting consumer needs is a necessary but no longer sufficient condition ofsustainable innovation. New products that stand alone longest in the marketplace,without serious competition, bring in the highest returns.SAGE SAGE BooksContact SAGE Publications at 35 of 42 SAGE Books – Corporate-Level StrategiesThe Habits of Mis-investmentMature industries are beset by underlying dynamics that make it difficult for them toinvest their money in the kinds of innovation that lead to long-term success.Companies such as Campbell Soup Company, General Mills Inc., and KelloggCompany spend an average of 1 to 2 percent of sales on R&D. Although a number ofstudies have shown that higher R&D spending does not guarantee success, aminimum innovation investment is required for breakthrough thinking. Without it,companies tend to fill the pipeline with the “base hits” of line extension. They fall into aself-created loop of low investment, low returns, and steady but slow growth. In theend, the slow growth is not enough to keep them from falling behind competitorsbecause everyone is in the same boat; but it does provide the illusion that the companyis succeeding—or at least not shrinking—which is then taken as proof that this strategyis smart.When the money not spent on R&D is instead spent on marketing, it reinforces theproblem. Inflated advertising budgets often reflect a defensive mind-set: Whencompetitors launch products with a full-bore assault in the media, executives concludethat they must follow suit with equally pricey campaigns or risk losing consumer shareof-mind. Money that goes into this type of “quick fix” is not available for the morefundamental solution of breakthrough innovation.Another factor in the misplacement of investment is the predisposition of the R&Dorganizations themselves. Eighty percent of new products in a typical mature industryyield less than $7.5 million in sales their first year. (See Exhibit 1.) (To put that numberinto perspective, grocery is a $350 billion wholesale business globally, and sales of amajor brand can top $500 million a year.) The industry logic is that competitors arecontinually introducing new versions of their products, so players are at a disadvantageif they don’t match that steady clip. The tendency is for companies to focus onrelatively small, often superficial line extensions that can be churned out quickly, aswhen Mars rolled out Tropical and Wild Berry Skittles candies in the early 1990s.Exhibit 1 Sales from New Product LaunchesSAGE SAGE BooksContact SAGE Publications at 36 of 42 SAGE Books – Corporate-Level StrategiesSource: Industrial Resource InstituteNo one would argue that advertising can’t pull the occasional rabbit out of a hat or thatcompanies should stop launching line extensions. But when excessive advertising andline extensions become habitual solutions, it suggests that a company is locked into apattern of high marketing spending and a need for endless small launches, and isunder-investing in the kinds of R&D efforts that would lead to greater profits.Seven Paths to AdvantageHow can companies break the cycle of low-risk, low-reward copycat innovation?Through a group of interrelated changes in strategy and execution. Successfulconsumer packaged goods (CPG) innovators, those whose new products establishand maintain dominance in the marketplace, tend to focus on seven areas. None ofthem represents a “silver bullet” on its own, and many of them are common sense, buttogether they make innovation more difficult to copy and lead to greater returns andhigher growth. Our analysis shows that mature companies consistently neglect theseareas. This is a pity, because they represent a powerful way to turbocharge aninnovation engine.Exhibit 1 New Technologies and Market Needs: A Dynamic DuoSAGE SAGE BooksContact SAGE Publications at 37 of 42 SAGE Books – Corporate-Level Strategies1.Source: Booz & CompanyTechnology and patents. New technologies are unbeatable in giving matureindustry players a meaningful advantage in the marketplace. Their powercomes from providing companies with a way to meet new consumer needs,including those that consumers don’t yet know they have. These innovationscan have the greatest value. In consumer health care, for instance, newproducts that match a new technology with a new market need deliver medianbrand growth of 11 percent, more than double the 5 percent growth of productsaddressing only an existing need. (See Exhibit 2.)Technology can provide a way to solve a significant consumer problem, as OreIda (a subsidiary of H. J. Heinz Company) proved with its Extra Crispy EasyFries in 2004. A persistent complaint about frozen french fries was that theyemerged soggy from the microwave. Ore-Ida solved this problem with its “XCrisp” flash-freeze processing technology. The result was genuinely crispymicrowaved fries cooked in four minutes, a successful new product.Even if new technology doesn’t prevent competitors from copying, it cansignificantly delay their launching of a copycat product. An example is Kellogg’sSpecial K Red Berries cereal, which introduced a freeze-dried berry processand captured more than $100 million in its first year—and it got a two-year jumpon archrival General Mills’s version.Alongside advantaged technologies comes the responsibility to defend them.This point is not lost on Procter & Gamble Company, which has a policy of zerotolerance on patent and other infringements. P&G has taken legal action, forexample, against Whitehall Laboratories to defend innovations in a hairconditioner formulation and against Perrigo Company to protect its core Olayskin-care brand.SAGE SAGE BooksContact SAGE Publications at 38 of 42 SAGE Books – Corporate-Level Strategies2.3.4.Claims. In the world of consumer goods, claims are often related to the healthefficacy of a product or ingredient. And claims add substantial value when theyare tied exclusively to a product and can be held for a significant period of time.In 2006, Mars developed a new line of chocolate bars, CocoaVia, which itlabeled “heart-healthy” because of the demonstrated cardiovascular benefits offlavanols, a natural antioxidant in cocoa beans. The claim provides asustainable point of differentiation because Mars owns patents related toprocessing technologies that are designed to retain higher concentrations offlavanols than regular chocolate manufacturing processes. The companydoesn’t release sales figures but says the product is “selling well,” and it isexpanding the line.Claims, however, can carry a downside risk, precisely because a competitiveadvantage that cannot be defended may quickly undermine any initial benefit.Competitors will often exploit a claim that is made for a widely availableingredient. Take the example of Quaker Oats, which spent a small fortuneproving to the satisfaction of the U.S. Food and Drug Administration that, yes,oat bran can help lower cholesterol. Quaker (a unit of PepsiCo) may be thepremier oatmeal brand, but oats are a commodity, and Quaker did not own anyspecial technologies related to this claim. General Mills, which makes Cheerios,was free to conduct its own piggyback studies and broadcast the cholesterollowering benefit widely in its product marketing. The result: Sales of Cheeriosclimbed 11 percent, while Quaker’s sales actually fell 3.5 percent.Ingredient synonymy. Think of baking soda, and what name comes to mind?How about peanuts? Or more recently, pomegranate juice? Arm & Hammer,Planters, and POM Wonderful, respectively, have each carved out an enviableposition by becoming virtual synonyms for their category. Such dominationaffords pricing power for products that are essentially commodities. It alsobuilds a barrier to competitive entry and allows economies of scale and highermargins.Perhaps more important, such synonymy with an active ingredient can providea powerful platform for entry into adjacent categories. Planters successfullyventured into candy bars, and Arm & Hammer launched a line of baking sodatoothpastes. In these examples, the ingredient itself provides the competitiveprotection. Crest and Colgate could—and did—develop baking sodatoothpastes, but they did not “fit” as well in the consumer’s mind. And POMWonderful has been able to leverage its dominance in juice into adjacentcategories, including blends, teas, and POMx antioxidant supplements. Thecompany’s sales grew almost 10-fold in the four years after its 2002 launch.Unique brand characteristics. Strong brands can build an identity inconsumers’ minds that transcends products. Few people can think of, say, theWall Street Journal and not get a sense of authority in business news. Forinnovation purposes, such a positioning can provide a springboard for newopportunities.An example can be found in the soft drink category. The Coca-Cola Company’sprimary asset is the formula of its flagship soda, and the company built on thattaste when it developed and launched Coca-Cola Zero, a low-calorie productSAGE SAGE BooksContact SAGE Publications at 39 of 42 SAGE Books – Corporate-Level Strategies5.6.intended to taste more like regular Coke than Diet Coke. PepsiCo couldn’tmimic Coca-Cola Zero, naturally, because its consumers want a product thattastes like Pepsi. It took Pepsi two years to develop a new diet cola called DietPepsi Max that leveraged its own unique taste assets—much longer than itgenerally takes to bring out a traditional line extension.Other characteristics that can provide unique advantage include a meaningfulheritage, which gives a certain emotional heft to new products or services from,say, Singapore Airlines. Positioning itself as the quintessence of whatWesterners think of as “Asian values,” the carrier has successfully emphasizedits hospitality and high-tech amenities, including new airplanes and in-flightentertainment systems. And there’s value in being recognized as dominant inone area; ESPN has used its position as the “Worldwide Leader in Sports” toexpand successfully into dining, with its ESPN Zone chain of themerestaurants.Product experience. Successful products have an emotional component thatbuilds a bridge to consumers, becoming part of their lives. Expanding on thisaspect of a brand can be another way to build difficult-to-copy value into aproduct. Logistically challenging and often costly, such an effort cannevertheless be effective for the right brand.Nestle SA has succeeded in transforming its Nespresso System into a chain ofstores that sell appliances and coffee. The Nespresso System centers on highquality packaged espresso packets that work with a special espresso maker. Itcarries an emotional claim as the first product to bring true cafe taste intoEuropean homes. Nestle capitalized on the system’s modularity and thecompany’s key relationships along the value chain to open 79 retail locations inGeneva, Vienna, Paris, Zurich, Moscow, and other cities.Packaging. Packaging is often viewed as an innovation afterthought. The truth,however, is that new formulation is often easy to copy, whereas packaginginnovation can leverage technology, emphasize unique brand characteristics,enhance the product experience, and in fact prove very difficult to duplicate.Packaging innovation often requires major changes to the manufacturingprocess, which is a strong defense. An example is Campbell’s Soup at Handmicrowave-safe containers, launched in 2002. Although their contents didn’tchange, these easily heated, sip-able containers rapidly became one of themost successful new products in Campbell’s history. The package helped thecompany’s ready-to-serve soup lines grow 8 percent in Soup at Hand’s first yearout and gave it a four-year head start on rival Progresso. This success evencaused the company’s president, Douglas R. Conant, to redirect his strategy,saying, “We intend to make the C in Campbell synonymous with convenience.”Although the new product’s value proposition was convenience, the fact that itwas neither easy nor cheap to copy helped drive its lasting success.Another game changer was tuna packaged in the Flavor Fresh Pouch, aninnovation introduced by Starkist (then a unit of Heinz) in 2000. This vacuumsealed foil package shook up the tuna fish industry when it appeared because,for the first time, packaged tuna could be sold in groceries without a can.SAGE SAGE BooksContact SAGE Publications at 40 of 42 SAGE Books – Corporate-Level Strategies7.Although competitors have since introduced their own foil packaging, theconvenience of this product continues to allow Starkist to charge a premium forit over tuna in cans.Effective vertical integration. With outsourcing and offshoring so common,and the heyday of soup-to-nuts global manufacturing entities decades in thepast, it may seem strange to insist that vertical integration can be a source ofdifficult-to-copy advantage. But for some companies, it is. Think of SwarovskiAG, which has maintained its position as the world’s finest crystal manufacturerby keeping a tight rein on its methods and processes. Over a century ofinnovations, the company has perfected a unique method for transforming sandand lead into some of the most beautiful objects in the world. Fearing a loss ofits advantage and closely guarded trade and technology secrets, the Wattens,Austria-based firm refuses to move its core technical operations out of thecountry, despite high labor costs there.The Advantage of ScaleAll of these strategies should be pursued together. It is possible to gain additionalbenefits by building scale, amplifying the effects of hard-to-copy innovations byspreading them across multiple products. (See “Design for Frugal Growth,” by JayaPandrangi, Steffen Lauster, and Gary L. Neilson, s+b, Autumn 2008.) For instance, abreakthrough technology or process can be applied to a number of products orcategories, as Frito-Lay Inc. (a subsidiary of PepsiCo) did with its “baked” chipsinnovation. The process allowed the company to produce lower-calorie, less-greasychips, and it was implemented across the Doritos, Tostitos, Lay’s, and Ruffles brands.Scale can be built up internationally by employing a common platform acrossgeographies, as Nicorette (a brand within Pharmacia AB’s international portfolio at thetime) managed to do with its nicotine replacement therapy smoking cessation products.The brand dominates this category in large part because of its coordinated crossborder strategy, encompassing logistics, distribution, regulatory compliance, andconsistent messaging that respects local sensitivities.It’s even possible to gain scale of a kind with a highly nimble, prolific innovationorganization. Launching a steady stream of good ideas, as P&G has done in homeproducts in recent years, can give a brand a reputation for fresh thinking thattranscends the individual ideas and translates into market share gains. (See “P&G’sInnovation Culture,” by A.G. Lafley, s+b, Autumn 2008.) The rules still apply; any newproduct must be difficult to copy or it will not maintain its value. But the whole can begreater than the sum of the parts. The brand itself can benefit from an aura oforiginality that translates into consumer preference and sales.Finally, we fully recognize that ideas that are difficult to copy are difficult to develop,and mature companies also need a strategy for when such ideas are in short supply.Here, we suggest defying conventional wisdom about being first to market. If a productcan be copied, it’s often more profitable to be the copier. Consider the Spanish-ownedclothing retailer Zara International Inc. (a subsidiary of Inditex), which has become oneof the world’s fastest-growing retailers by combining an efficient supply chain with asuccessful knockoff strategy. This formidable one-two punch caused LVMH MoetSAGE SAGE BooksContact SAGE Publications at 41 of 42 SAGE Books – Corporate-Level StrategiesHennessy Louis Vuitton SA’s Daniel Piette to call it “possibly the most innovative anddevastating retailer in the world.”One company that’s managed to employ many of these strategies to its own benefit isthe one we started with: Mars. Over the past few years, it has seen its sales growthrebound to 16 percent. The company has successfully chipped away at risk aversion inR&D and streamlined its cumbersome market testing processes. It’s had a number ofsuccessful launches, including Snickers Marathon, the CocoaVia line, and WholeMealsbone-shaped pet food.Mars also renewed its emphasis on production and formulation technologies that itcould apply across multiple products. For example, it holds patents on the special inkused to print personalized M&Ms, themselves a significant new development meetingan emerging consumer desire for customized confections. These personalized candies,called My M&M’s, were developed by an internal team in just 90 days using astreamlined R&D process. As these and other examples have shown, companies canfind a lot of life after middle age. The key is to have the right attitude. You can’t be akid again, but we’ve mapped out some of the roads that could lead to renewal.The magic formula for keeping innovation healthy in a mature industry is knowing thereis no magic formula. If staying young and strong were easy, we’d live in a differentworld. There will always be a place for line extensions backed with big campaigns andfor being first to market. But it’s important to make sure when you’re dipping into yourown fountain that your competitor isn’t standing right beside you with a siphon.Reprint No. 08306Author Profiles:Alexander Kandybin is a partner in Booz & Company’s consumer products andmedia practice based in New York. He works with leading consumer products,health-care, and chemicals companies on growth and innovation strategies, raisingreturns on innovation investments, and building sustainable growth and innovationcapabilities.Surbhee Grover is a senior associate with Booz & Company’s consumer productsand media practice in New York. She focuses on helping firms meet innovationchallenges in product introduction processes, portfolio management, and capabilitydevelopment, and on developing strategies for growth imperatives.Also contributing to this article was Booz & Company associate Jeannette Chang. SAGE BooksContact SAGE Publications at 42 of 42 SAGE Books – Corporate-Level Strategies