8.4: Implementing Corporate Strategy

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Kennedy et al.
Virginia Tech via Virginia Tech Libraries' Open Education Initiative

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Once a firm decides which corporate strategy to pursue, it must implement that strategy successfully. As noted earlier, many attempts to diversify end in failure. Executing a good implementation plan successfully is key.

There are various ways that a firm can implement their corporate diversification strategy. These are:

Internal Development
Strategic Alliance
Joint Venture
Merger and Acquisition

Internal Development

When deciding what business to be in, sometimes an organization chooses internal development. Internal development means the company develops and launches the new business themselves. To do this, the firm should have a strong entrepreneurial orientation, as this implementation method is the same process as starting a new business. A firm may select this method if they have sufficient resources and capabilities within the firm or can hire the expertise and knowledge to develop this new business unit and achieve the marketing and sales required to be successful. Internal development has been the implementation method of choice for Apple’s corporate strategy. Apple has used internal development to enter new markets. Apple moved from the computer industry to the music industry with iPod and Apple music and then into the smartphone industry by developing internal capabilities and resources. This is a very costly and time-intensive strategy, but as is evident with Apple, it can be extremely lucrative and create many competitive benefits.

Strategic Alliance

A firm might implement their corporate strategy by working with another firm, even if that firm is a competitor. A strategic alliance is a mutually beneficial relationship between two organizations, usually governed through a contractual agreement. The firms may agree to share expertise or knowledge, resources, supply chain activities, distribution channels, research and development, etc.. Often money changes hands as one company provides what the other company needs. T-Mobile and Nokia entered into a strategic alliance in 2018, where for a fee, Nokia helped T-Mobile develop its 5G network. Barnes & Noble and Starbucks have a strategic alliance whereby Starbucks puts their coffee shops inside of the Barnes & Noble bookstores. In all these examples, an alliance was beneficial for both companies.

Joint Venture

Similar to a strategic alliance, two or more companies form a joint venture when they “birth” a third company, and the joint venture partners are shared owners of the new firm. With a joint venture, a new company is always formed. The ownership arrangement can vary as to how much each partner owns and how much each partner has control. Typically, profits of the new company are shared according to the ownership percentages. Joint ventures can work well, even among competitors, when each partner brings something of value to the venture that the other partner could use. US airplane manufacturer Boeing created a joint venture with the Brazilian aircraft manufacturer of smaller commercial jets Embraer to start a third company that will get Boeing into the smaller passenger planes market. Boeing owns 80% of the company, and Embraer 20% (AP News, 2019).

Mergers and Acquisitions

A common method for firms to diversify is through mergers and acquisitions. A merger is between two companies of similar size and are less common. Acquisitions occur when one company buys another. Typically, a larger company acquires a smaller one. Mergers and acquisitions (M & A) may occur between competitors, which reduces the competition in the market. In this situation, the M & A is an example of related diversification and horizontal integration. T-Mobile’s merger with Sprint is an example. Firms might acquire other companies in their value chain to give them more control within the industry. Moving into their suppliers’ industry is backward integration, and buying companies in industries they sell to is forward integration. Forward integration is illustrated by Apple establishing Apple Stores and having direct involvement in the retail market. One way to diversify by acquisitions is through unrelated diversification. Unrelated diversification occurs when one company purchases another company that is located in an industry the first company is not involved in. An example of this strategy is Berkshire Hathaway owning companies in industries as diverse as insurance and railroads.

References

AP News. (2019, February 26). Embraer shareholders approve jet joint venture with Boeing. https://apnews.com/590254a4075f4e9580258e829862a1a7.