Corporate Strategies Chapter 6
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Corporate StrategiesChapter 6
Built by Stambaugh/2009 Never invest in a business you cannot understand … Warren Buffett
Jeff Stambaughjeff.stambaugh@mwsu.edu
http://faculty.mwsu.edu/business/jeff.stambaugh
Chapter Objectives
Built by Stambaugh/2009
■ Understand multi-product strategies (diversification), including why and the pitfalls that could occur
■ Understand various ways to achieve diversification■ Internal■ M&A■ Strategic Alliances
Never invest in a business you cannot understand … Warren Buffett
Corporate Strategy
Built by Stambaugh/2009
■ What Businesses should we be in■ How can these businesses be managed to create
synergy
Never invest in a business you cannot understand … Warren Buffett
Diversification Enhances Shareholder Value By:
Built by Stambaugh/2009
■ Develop economies of scope■ Leverage existing core competences■ Share activities / info■ Expand into / build new competences
■ Gain Market Power■ Wicker with Porter’s Five Forces (at all levels)
■ For unrelated diversification:■ Corporate parenting advantages
■ I say Honda you say? Link
Never invest in a business you cannot understand … Warren Buffett
Economies of Scope
Built by Stambaugh/2009
■ Synergy in Core Competences■ Create value■ Hard to imitate / substitute for■ Businesses must tap into a common core competence (Apple) II
■ Sharing (cost sharing and revenue enhancement)■ Common Resources (parts)■ Distribution Channels■ Cross-selling customers
Never invest in a business you cannot understand … Warren Buffett
Market Power
Built by Stambaugh/2009
■ Vertical■ Horizontal
Never invest in a business you cannot understand … Warren Buffett
Vertical Integration
Built by Stambaugh/2009
A secure source of raw materials or distribution channels. Protection of and control over valuable assets. Access to new business opportunities Simplified procurement and administrative procedures.
Benefits
RisksCosts and expenses associated with increased overhead and
capital expendituresLoss of flexibility resulting from large investments.Problems associated with unbalanced capacities along the
value chain.Additional administrative costs associated with managing a
more complex set of activities.
Never invest in a business you cannot understand … Warren Buffett
Vertical Integration
Built by Stambaugh/2009
■ Are existing suppliers doing adequate job■ Are outsourced/partner functions a viable profit
source (backward / forward integration)■ Stability in demand■ What percentage of production capability would be
absorbed by existing products■ Do we possess the core competences■ Will vertical integration generate a negative reaction
Never invest in a business you cannot understand … Warren Buffett
Transaction Costs
Built by Stambaugh/2009
■ Search■ Negotiating■ Contracting■ Monitoring■ Enforcing … plus concerns about putting “your secrets” out
there
Make or Buy is a complicated decision
Never invest in a business you cannot understand … Warren Buffett
Unrelated Diversification
Built by Stambaugh/2009
■ Management / Leadership as core competency Link ■ Restructuring (what doesn’t the market know)■ Efficient internal markets (resource allocation)
Never invest in a business you cannot understand … Warren Buffett
Current Trends
Built by Stambaugh/2009
■ Unrelated diversification is “out” after being “in” through the 1960s - 1980s
■ Private equity firms■ Many firms are concentrating more on their core
competencies (dis-integrating some companies)■ Survey says …
Never invest in a business you cannot understand … Warren Buffett
How to Diversify
Built by Stambaugh/2009
■ Internal Growth■ Slow and Steady
■ Mergers and Acquisition (M&As)■ Strategic Alliances
Never invest in a business you cannot understand … Warren Buffett
Famous Acquisitions / Mergers
Built by Stambaugh/2009
■ Google and YouTube ($1.65B)■ News Corp and MySpace ($580M)■ Disney and Pixar■ AOL and Time Warner■ Bank of America and Merrill Lynch■ Adidas and Reebok■ SBC and ATT and BellSouth■ GE and NBC■ Exxon and Mobil■ JPMorgan and Wachovia■ Oracle and PeopleSoft■ Daimler (Mercedes Benz) and Chrysler■ US Airways and America West
So How Well Does It Work?So How Well Does It Work?
Never invest in a business you cannot understand … Warren Buffett
M&As Basics
Built by Stambaugh/2009
■ Why?■ Fast Growth (market power / reduce costs)■ Obtain resources / Create synergy■ Block Competitors / Force consolidation■ Enter new markets
■ How?■ Screen / Approach Target■ Due Diligence■ Negotiate■ Integrate
Never invest in a business you cannot understand … Warren Buffett
How Not to Succeed
Built by Stambaugh/2009 Never invest in a business you cannot understand … Warren Buffett
Keys To Success
Built by Stambaugh/2009
■ Synergy … not more of same■ Don’t overpay … minimize acquisition premium
■ Hostile takeovers and bidding wars■ Manage debt
■ Keep it friendly■ Pay attention to integration
■ Compatible Culture■ Get ‘er done
Never invest in a business you cannot understand … Warren Buffett
Jack Welch’s Keys To M&A Success
Built by Stambaugh/2009
■ Merger of equals don’t work■ No “reverse hostages”■ Culture fit as important as strategic fit■ Get the integration done w/i 90 days■ Reap best from both sides (no conqueror syndrome)■ Don’t overpay
Never invest in a business you cannot understand … Warren Buffett
Some Examples of Alliances
Built by Stambaugh/2009
■ ATT (SBC) / Yahoo / DISH network■ GM-Chinese Automakers■ Lockheed Martin-Augusta Westland■ Samsung – Sony Flat Screen JV■ Star Airline Alliance (Oneworld, etc)■ Google – Yahoo (Maybe)■ GE – Tatung HDTV
Never invest in a business you cannot understand … Warren Buffett
Strategic Alliances
Built by Stambaugh/2009
■ About a lot more than diversification■ Enter new markets / Gain access to restricted markets■ Share risks■ Joint R&D (combine new technologies)■ Outsource (opposite of diversification) to reduce costs■ Meet competitive challenges (create economies of scope
and scale)■ LEARN!
Never invest in a business you cannot understand … Warren Buffett
The Story of the 787
Built by Stambaugh/2009
■ Estimated development costs--$9 Billion
■ Workshare■ Fuselage: 4 Firms (US, Italy,
Japan■ Wings: 2 Firms (Japan)■ Tail: 2 firms (US & Italy)■ Landing Gear: 1 firm (UK)■ Engines: 3 firms (US & UK)
■ Assembly Goal: 3 days!■ Boeing does ~35% of total
manufacturing
Never invest in a business you cannot understand … Warren Buffett
Risks in Alliances
Built by Stambaugh/2009
■ 50-70% end in failure (what constitutes failure?)■ Primary problems
■ Culture clash (both cultural and corporate)■ Misrepresentation / misunderstanding of core
competencies■ Unwillingness to share important resources■ Opportunism: take the goodies and run
Never invest in a business you cannot understand … Warren Buffett
Risks in Alliances
Built by Stambaugh/2009
■ What to do?■ Pick wisely (Cultural fit? Values? Goals?
Contributions?)■ What do THEY want out of this alliance!What do THEY want out of this alliance!
■ Contracts sufficient to the task■ Trust, trust, trust (but be ready to verify)■ Commit to the relationship (requiring substantial
equity helps this commitment)
Never invest in a business you cannot understand … Warren Buffett
Managers Gone Wild! (or other reasons why these things don’t work)
Built by Stambaugh/2009
■ Size for size’s sake■ Ego (stupidity)■ Job protection
Never invest in a business you cannot understand … Warren Buffett
Summary
Built by Stambaugh/2009
■ Multi-product strategies often used■ Widely varying levels of diversification
■ Trend is toward moderate / high (versus very high) diversification
■ Key is to generate synergies by sharing resources and core competencies
■ Internal growth, M&A, and alliances all ways to pursue diversification
■ Each involves significant tradeoffs
Never invest in a business you cannot understand … Warren Buffett
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