C H A P T E R 8 Selecting Corporate-Level Strategies


After reading this chapter, you should be able to understand and articulate answers to the following questions:

1. Why might a firm concentrate on a single industry? 2. What is vertical integration and what benefits can it provide? 3. What are the two types of diversification and when should they be used? 4. Why and how might a firm retrench or restructure? 5. What is portfolio planning and why is it useful?

What’s the Big Picture at Disney?

Walt Disney remains a worldwide icon five decades after his death.

Source: http://en.wikipedia.org/wiki/File:Walt_Disney_Snow_white_1937_trailer_screenshot_(13).jpg.

The animated film Cars 2 was released by Pixar Animation Studios in late June 2011. This sequel to the smash hit Cars made $66 million at the box office on its opening weekend and appeared likely to be yet another commercial success for Pixar’s parent corporation, The Walt Disney Company. By the second weekend after its release, Cars 2 had raked in $109 million.

Although Walt Disney was a visionary, even he would have struggled to imagine such enormous numbers when his company was created. In 1923, Disney Brothers Cartoon Studio was started by Walt and his brother Roy in their uncle’s garage. The fledgling company gained momentum in 1928 when a character was invented that still plays a central role for Disney today—Mickey Mouse. Disney expanded beyond short cartoons to make its first feature film, Snow White and the Seven Dwarves, in 1937.

Following a string of legendary films such as Pinocchio (1940), Fantasia (1940), Bambi (1942), and Cinderella (1950), Walt Disney began to diversify his empire. His company developed a television series for the American Broadcasting Company (ABC) in 1954 and opened the Disneyland theme park in 1955. Shortly before its opening, the theme park was featured on the television show to expose the American public to Walt’s innovative ideas. One of the hosts of that episode was Ronald Reagan, who twenty-five years later became president of the United States. A larger theme park, Walt Disney World, was opened in Orlando in 1971. Roy Disney died just two months after Disney World opened; his brother Walt had passed in 1966 while planning the creation of the Orlando facility.

The Walt Disney Company began a series of acquisitions in 1993 with the purchase of movie studio Miramax Pictures. ABC was acquired in 1996, along with its very successful sports broadcasting company, ESPN. Two other important acquisitions were made during the following decade. Pixar Studios was purchased in 2006 for $7.4 billion. This strategic move brought a very creative and successful animation company under Disney’s control. Three years later, Marvel Entertainment was acquired for $4.24 billion. Marvel was attractive because of its vast roster of popular characters, including Iron Man, the X-Men, the Incredible Hulk, the Fantastic Four, and Captain America. In addition to featuring these characters in movies, Disney could build attractions around them within its theme parks.

With annual revenues in excess of $38 billion, The Walt Disney Company was the largest media conglomerate in the world by 2010. It was active in four key industries. Disney’s theme parks included not only its American locations but also joint ventures in France and Hong Kong. A park in Shanghai, China, is slated to open by 2016. The theme park business accounted for 28 percent of Disney’s revenues.

Disney’s presence in the television industry, including ABC, ESPN, Disney Channel, and ten television stations, accounted for 45 percent of revenues. Disney’s original business, filmed entertainment, accounted for 18 percent of revenue. Merchandise licensing was responsible for 7 percent of revenue. This segment of the business included children’s books, video games, and 350 stores spread across North American, Europe, and Japan. The remaining 2 percent of revenues were derived from interactive online technologies. Much of this revenue was derived from Playdom, an online gaming company that Disney acquired in 2010.[1]

By mid-2011, questions arose about how Disney was managing one of its most visible subsidiaries. Pixar’s enormous success had been built on creativity and risk taking. Pixar executives were justifiably proud that they made successful movies that most studios would view as quirky and too off-the-wall. A good example is 2009’s Up!, which made $730 million despite having unusual main characters: a grouchy widower, a misfit “Wilderness Explorer” in search of a merit badge for helping the elderly, and a talking dog. Disney executives, however, seemed to be adopting a much different approach to moviemaking. In a February 2011 speech, Disney’s chief financial officer noted that Disney intended to emphasize movie franchises such as Toy Story and Cars that can support sequels and sell merchandise.

When the reviews of Pixar’s Cars 2 came out in June, it seemed that Disney’s preferences were the driving force behind the movie. The film was making money, but it lacked Pixar’s trademark artistry. One movie critic noted, “With Cars 2, Pixar goes somewhere new: the ditch.” Another suggested that “this frenzied sequel seldom gets beyond mediocrity.” A stock analyst that follows Disney perhaps summed up the situation best when he suggested that Cars 2 was “the worst-case scenario.…A movie created solely to drive merchandise. It feels cynical. Parents may feel they’re watching a two-hour commercial.”[2] Looking to the future, Pixar executives had to wonder whether their studio could excel as part of a huge firm. Would Disney’s financial emphasis destroy the creativity that made Pixar worth more than $7 billion in the first place? The big picture was definitely unclear.

Will John Lassiter, Pixar’s chief creative officer, be prevented from making more quirky films like Up! by parent company Disney?

Source: http://upload.wikimedia.org/wikipedia/commons/b/bc/John_Lasseter-Up-66th_Mostra.jpg.


When dealing with corporate-level strategy, executives seek answers to a key question: In what industry or industries should our firm compete? The executives in charge of a firm such as The Walt Disney Company must decide whether to remain within their present domains or venture into new ones. In Disney’s case, the firm has expanded from its original business (films) and into television, theme parks, and several others. In contrast, many firms never expand beyond their initial choice of industry.


1. CONCENTRATION STRATEGIES FIGURE 8.1 Concentration Strategies


concentration strategies

Actions that firms use to try to compete successfully only within a single industry.

market penetration

An attempt to gain additional share of existing markets using existing products.

Nike relies in part on a market penetration strategy within the athletic shoe business.

Source: http://www.flickr.com/



market development

Trying to sell existing products within new markets.


1. Name and understand the three concentration strategies. 2. Be able to explain horizontal integration and two reasons why it often fails.

For many firms, concentration strategies are very sensible. These strategies involve trying to com- pete successfully only within a single industry. McDonald’s, Starbucks, and Subway are three firms that have relied heavily on concentration strategies to become dominant players.

1.1 Market Penetration There are three concentration strategies: (1) market penetration, (2) market development, and (3) product development (Figure 8.1). A firm can use one, two, or all three as part of their efforts to excel within an industry.[3] Market penetration involves trying to gain additional share of a firm’s existing markets using existing products. Often firms will rely on advertising to attract new customers with ex- isting markets.

Nike, for example, features famous athletes in print and television ads designed to take market share within the athletic shoes business from Adidas and other rivals. McDonald’s has pursued market penetration in recent years by using Latino themes within some of its advertising. The firm also main- tains a Spanish-language website at http://www.meencanta.com; the website’s name is the Spanish translation of McDonald’s slogan “I’m lovin’ it.” McDonald’s hopes to gain more Latino customers through initiatives such as this website.

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


Starbucks’ market development strategy has allowed fans to buy its beans in grocery stores.

Source: http://en.wikipedia.org/wiki/


product development

Creating new products to serve existing markets.

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

1.3 Product Development Product development involves creating new products to serve existing markets. In the 1940s, for ex- ample, Disney expanded its offerings within the film business by going beyond cartoons and creating movies featuring real actors. More recently, McDonald’s has gradually moved more and more of its menu toward healthy items to appeal to customers who are concerned about nutrition.

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

Product development is a popular strategy in the soft-drink industry, but not all developments pay off. Coca-Cola Black (a blending of cola and coffee flavors) was launched in 2006 but discontinued in 2008.

Source: http://www.flickr.com/photos/buglugs/1536568227/sizes/o/in/photostream.

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


horizontal integration

Pursuing a concentration strategy by acquiring or merging with a rival.


When one company purchases another company.


The joining of two similarly sized companies into one company.

1.4 Horizontal Integration: Mergers and Acquisitions

FIGURE 8.2 Horizontal Integration

Rather than rely on their own efforts, some firms try to expand their presence in an industry by acquir- ing or merging with one of their rivals. This strategic move is known as horizontal integration (Figure 8.2). An acquisition takes place when one company purchases another company. Generally, the acquired company is smaller than the firm that purchases it. A merger joins two companies into one. Mergers typically involve similarly sized companies. Disney was much bigger than Miramax and Pixar when it joined with these firms in 1993 and 2006, respectively, thus these two horizontal integra- tion moves are considered to be acquisitions.

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

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


purchased firms have market share that is attractive. Part of the motivation behind Southwest Airlines’ purchase of AirTran was that AirTran had a significant share of the airline business in cities—especially Atlanta, home of the world’s busiest airport—that Southwest had not yet entered. Rather than build a presence from nothing in Atlanta, Southwest executives believed that buying a position was prudent.

Horizontal integration can also provide access to new distribution channels. Some observers were puzzled when Zuffa, the parent company of the Ultimate Fighting Championship (UFC), purchased rival mixed martial arts (MMA) promotion Strikeforce. UFC had such a dominant position within MMA that Strikeforce seemed to add very little for Zuffa. Unlike UFC, Strikeforce had gained exposure on network television through broadcasts on CBS and its partner Showtime. Thus acquiring Strikeforce might help Zuffa gain mainstream exposure of its product.[4]

The combination of UFC and Strikeforce into one company may accelerate the growing popularity of mixed martial arts.

Source: http://www.flickr.com/photos/hydropeek/4533084943/sizes/o/in/photostream.

Despite the potential benefits of mergers and acquisitions, their financial results often are very disap- pointing. One study found that more than 60 percent of mergers and acquisitions erode shareholder wealth while fewer than one in six increases shareholder wealth.[5] Some of these moves struggle be- cause the cultures of the two companies cannot be meshed. This chapter’s opening vignette suggests that Disney and Pixar may be experiencing this problem. Other acquisitions fail because the buyer pays more for a target company than that company is worth and the buyer never earns back the premium it paid.

In the end, between 30 percent and 45 percent of mergers and acquisitions are undone, often at huge losses.[6] For example, Mattel purchased The Learning Company in 1999 for $3.6 billion and sold it a year later for $430 million—12 percent of the original purchase price. Similarly, Daimler-Benz bought Chrysler in 1998 for $37 billion. When the acquisition was undone in 2007, Daimler recouped only $1.5 billion worth of value—a mere 4 percent of what it paid. Thus executives need to be cautious when considering using horizontal integration.


< A concentration strategy involves trying to compete successfully within a single industry.

< Market penetration, market development, and product development are three methods to grow within an industry. Mergers and acquisitions are popular moves for executing a concentration strategy, but executives need to be cautious about horizontal integration because the results are often poor.



1. Suppose the president of your college or university decided to merge with or acquire another school. What schools would be good candidates for this horizontal integration move? Would the move be a success?

2. Given that so many mergers and acquisitions fail, why do you think that executives keep making horizontal integration moves?

3. Can you identify a struggling company that could benefit from market penetration, market development, or product development? What might you advise this company’s executives to do differently?


2. VERTICAL INTEGRATION STRATEGIES FIGURE 8.3 Vertical Integration at American Apparel


vertical integration

When a firm gets involved in new portions of the value chain.


1. Understand what backward vertical integration is. 2. Understand what forward vertical integration is. 3. Be able to provide examples of backward and forward vertical integration.

When pursuing a vertical integration strategy, a firm gets involved in new portions of the value chain (Figure 8.3). This approach can be very attractive when a firm’s suppliers or buyers have too much power over the firm and are becoming increasingly profitable at the firm’s expense. By entering the domain of a supplier or a buyer, executives can reduce or eliminate the leverage that the supplier or buyer has over the firm. Considering vertical integration alongside Porter’s five forces model highlights that such moves can create greater profit potential. Firms can pursue vertical integration on their own, such as when Apple opened stores bearing its brand, or through a merger or acquisition, such as when eBay purchased PayPal.

In the late 1800s, Carnegie Steel Company was a pioneer in the use of vertical integration. The firm controlled the iron mines that provided the key ingredient in steel, the coal mines that provided the fuel for steelmaking, the railroads that transported raw material to steel mills, and the steel mills them- selves. Having control over all elements of the production process ensured the stability and quality of key inputs. By using vertical integration, Carnegie Steel achieved levels of efficiency never before seen in the steel industry.

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

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

The 2010 explosion of the Deepwater Horizon oil rig cost eleven lives and released nearly five million barrels of crude oil into the Gulf of Mexico.

Source: http://en.wikipedia.org/wiki/File:Deepwater_Horizon_offshore_drilling_unit_on_fire_2010.jpg.

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

Vertical integration can also create complacency. Consider, for example, a situation in which an aluminum company is purchased by a can company. People within the aluminum company may


backward vertical integration

A strategy that involves a buyer entering the industry that it purchases goods or services from.

forward vertical integration

A strategy that involves a supplier entering the industry that it supplies inputs to.

believe that they do not need to worry about doing a good job because the can company is guaranteed to use their products. Some companies try to avoid this problem by forcing their subsidiary to compete with outside suppliers, but this undermines the reason for purchasing the subsidiary in the first place.

2.1 Backward Vertical Integration A backward vertical integration strategy involves a firm moving back along the value chain and en- tering a supplier’s business. Some firms use this strategy when executives are concerned that a supplier has too much power over their firms. In the early days of the automobile business, Ford Motor Com- pany created subsidiaries that provided key inputs to vehicles such as rubber, glass, and metal. This ap- proach ensured that Ford would not be hurt by suppliers holding out for higher prices or providing materials of inferior quality.

To ensure high quality, Ford relied heavily on backward vertical integration in the early days of the automobile industry.

Source: http://en.wikipedia.org/wiki/File:Ford_1939.jpg.

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

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

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


The massive number of cars purchased by rental car agencies makes forward vertical integration a tempting strategy for automakers.


diversification strategies

Involve a firm entering entirely new industries.

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

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

In contrast, Apple’s stores are popular in part because store employees are experts about Apple products. They can therefore provide customers with accurate and insight- ful advice about purchases and repairs. This is an important advantage that has been created through forward vertical integration.


< Vertical integration occurs when a firm gets involved in new portions of the value chain. By entering the domain of a supplier (backward vertical integration) or a buyer (forward vertical integration), executives can reduce or eliminate the leverage that the supplier or buyer has over the firm.


1. Identify a well-known company that does not use backward or forward vertical integration. Why do you believe that the firm’s executives have avoided these strategies?

2. Some universities have used vertical integration by creating their own publishing companies. The Harvard Business Press is perhaps the best-known example. Are there other ways that a university might vertical integrate? If so, what benefits might this create?



1. Explain the concept of diversification. 2. Be able to apply the three tests for diversification. 3. Distinguish related and unrelated diversification.

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

3.1 Three Tests for Diversification A proposed diversification move should pass three tests or it should be rejected.[7]

1. How attractive is the industry that a firm is considering entering? Unless the industry has strong profit potential, entering it may be very risky.


2. How much will it cost to enter the industry? Executives need to be sure that their firm can recoup the expenses that it absorbs in order to diversify. When Philip Morris bought 7Up in the late 1970s, it paid four times what 7Up was actually worth. Making up these costs proved to be impossible and 7Up was sold in 1986.

3. Will the new unit and the firm be better off? Unless one side or the other gains a competitive advantage, diversification should be avoided. In the case of Philip Morris and 7Up, for example, neither side benefited significantly from joining together.

3.2 Related Diversification

FIGURE 8.4 The Sweet Fragrance of Success: The Brands That “Make Up” the Lauder Empire


related diversification

When a firm moves into a new industry that has important similarities with the firm’s existing industry or industries.

core competency

A skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business.

Honda’s related diversification strategy has taken the firm into several businesses, including boat motors.

Source: http://upload.wikimedia.org/



Related diversification occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or industries (Figure 8.4). Because films and television are both aspects of entertainment, Disney’s purchase of ABC is an example of related diversification. Some firms that engage in related diversification aim to develop and exploit a core competency to become more suc- cessful. A core competency is a skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business.[8] For example, Newell Rubbermaid is skilled at identifying underperforming brands and integrating them in- to their three business groups: (1) home and family, (2) office products, and (3) tools, hardware, and commercial products.

Honda Motor Company provides a good example of leveraging a core competency through related diversification. Although Honda is best known for its cars and trucks, the company actually started out in the motorcycle business. Through competing in this business, Honda developed a unique ability to build small and reliable engines. When executives decided to diversify into the automobile industry, Honda was successful in part because it leveraged this ability within its new business. Honda also ap- plied its engine-building skills in the all-terrain vehicle, lawn mower, and boat motor industries. Sometimes the benefits of related diversification that executives hope to enjoy are never achieved. Both soft drinks and cigarettes are products that consumers do not need. Companies must convince con- sumers to buy these products through marketing activities such as branding and advertising. Thus, on the surface, the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to take its existing marketing skills and apply them within a new industry. Unfortunately, the possible be- nefits to 7Up never materialized.


unrelated diversification

When a firm enters an industry that lacks any important similarities with the firm’s existing industry or industries.

3.3 Unrelated Diversification

FIGURE 8.5 Unrelated Di