Section 5 Corporate Level Strategy: Creating Value through Diversification
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Section 5
Corporate Level Strategy: Creating Value through Diversification
Vertical Integration
Forward or backwards– Full integration– Taper integration
Benefits– Barrier to entry– Specialized assets– Protecting product quality– Improved scheduling
Risks– Costs– Rapid technological changes– Demand predictability
Alternatives to Vertical Integration
Competitive bidding Long term contracts or strategic alliances
– Hostage taking– Credible commitments– Maintaining market discipline
Outsourcing
Cost reduction and differentiation Hold-ups, scheduling and hallowing out
Snack Foods Beverages
Foods
Frito-Lay North AmericaFrito-Lay International
Pepsi-Cola North AmericaGatorade/Tropicana North AmericaPepsiCo Beverages International
Quaker North America
Snack Foods
Frito-Lay North America
Lay’sRuffles DoritosSantitasFritos CheetosRold Gold
Funyuns Sunchips Cracker Jack Chester’s popcornGrandma’s cookiesMunchos Smartfood Baken-ets fried pork skinsOberto meat snacks
Snack Foods
Frito-Lay International
Bocabits wheat snacksCrujitos corn snacksFandangos corn snacksHamkas snacksNiknaks cheese sticksQuavers potato snacksSabritas potato chips Twisties cheese snacks
Walkers potato crispsWalkers Square potato snacksWalkers Monster Munch Corn snacks Miss Vickie’s potato chipsGamesa cookiesDippasSonric’s sweet snacks
Snack Foods
Frito-Lay International
Bocabits wheat snacksCrujitos corn snacksFandangos corn snacksHamkas snacksNiknaks cheese sticksQuavers potato snacksSabritas potato chips Twisties cheese snacks
Walkers potato crispsWalkers Square potato snacksWalkers Monster Munch Corn snacks Miss Vickie’s potato chipsGamesa cookiesDippasSonric’s sweet snacks
Beverages
Pepsi-Cola North America
Pepsi-ColaMountain DewSliceMugSierra MistFruitWorks
Lipton Dole Aquafina Frappuccino SoBe AMP
Beverages
Gatorade/Tropicana North America
GatoradePropelTropicanaDole juices
Beverages
PepsiCo Beverages International
Loóza juices and nectarsCopella juicesFrui’Vita juicesTropicana 100 juices
Foods
Quaker North America
Quaker OatsCap’n Crunch cerealLife cerealQuisp cerealKing Vitaman cerealMother’s cereal
Quaker rice cakes and granola barsRice-A-Roni side dishesNear East couscous/pilafsAunt Jemima mixes & syrupsQuaker grits
Foods
Quaker North America
Quaker OatsCap’n Crunch cerealLife cerealQuisp cerealKing Vitaman cerealMother’s cereal
Quaker rice cakes and granola barsRice-A-Roni side dishesNear East couscous/pilafsAunt Jemima mixes & syrupsQuaker grits
Business Level Strategies
How are we going to compete and gain a competitive advantage in each of our businesses?
Snack Foods Beverages
Foods
Corporate Level Strategy1) What businesses do we want to compete in?2) How do manage effectively across businesses
Where did they go?
Crafting Corporate Strategy
Moves to enter new businesses
Boosting combined performance of the businesses
Capturing synergies and turning them into competitive advantages
Establishing investment priorities and steering resources into business units
How to Diversify?
1) Internal Development - corporate entrepreneurship– able to appropriate a larger portion of wealth– avoids complexities of multiple partners– time consuming and requires diversity of
organizational capabilities
How to Diversify?
2) Strategic Alliances and Joint Ventures– entering a new market via the combination of
complementary resources - do more together– cost reduction– development/diffusion of technology
Problems with– appropriate partners - skills and compatibility– trust and commitment– communication
Who Makes a Geo?
Geo Storm was actually manufactured by Isuzu. The Storm is the Isuzu Impulse.
Geo Prizm = Toyota Corolla
Geo Tracker = Suzuki Sidekick
Geo Metro = Suzuki Esteem or Swift w/hatchback
No Geo cars were actually made by General Motors. They were all imported from foreign manufacturers.
How to Diversify?
3) Merger & Acquisition - acquisition of assets and capabilities of another company– high tech & technology intensive– access to products– consolidation– access to segments
Alternative 10 point option
In lieu of making a donation, you may write a 5 page, double spaced paper on how a specific company proactively pursues corporate responsible activities.
Extra Credit – 10 points
Girls’ and Boys’ Town, the original Father Flanagan's Boys' Home, is a leader in the treatment and care of abused, abandoned and neglected girls and boys. Throughout its 86-year history, the nonprofit, nonsectarian organization has provided these children with a safe, caring, loving environment where they gain confidence to get better and learn skills to become productive citizens.
Extra Credit – 10 points
Bring one of the items listed below:
New/gently used backpacks or suitcases
Socks - 5 pairs
Shampoo and Conditioner – 3 pints
New/gently used sporting equipment
Refill bottle of 409/All purpose cleaner
Laundry detergent
Extra Credit Drop off
BA1 Building - Room 307 Times: Wednesday 3/30 4:00 pm – 6:30 pm
Thursday 3/31 8:30 am – 9:30 am11:30 am – 8:00 pm
Friday 4/1 8:30 am – 11:00 amMonday 4/4 1:00 pm – 6:00 pmTuesday 4/5 8:30 am – 9:00 am
2:30 pm – 5:00 pmWednesday 4/6 4:00 pm – 6:30 pmThursday 4/7 8:30 am – 9:30 am
11:30 am – 8:00 pm
Acquisitions
Reasons of Acquisitions
Increase Market Power
Overcome Entry Barriers
Increased Speed
Lower Risk
Avoid Competition
Acquisitions
Reasons of Acquisitions
Increase Market Power
Overcome Entry Barriers
Increased Speed
Lower Risk
Avoid Competition
Problems with Acquisitions
Integration of two firms
Overpayment/Debt
Overestimation of Synergy
Overdiversification
Managerial energy absorption
Become too large
Substitute for innovation
Acquisitions
Reasons of Acquisitions
Increase Market Power
Overcome Entry Barriers
Increased Speed
Lower Risk
Avoid Competition
Problems with Acquisitions
Integration of two firms
Overpayment/Debt
Overestimation of Synergy
Overdiversification
Managerial energy absorption
Become too large
Substitute for innovation
Results
Poor Performance
Who Wins?
Acquired FirmShareholders
Monday October 27th WSJ
Bank of American – Boston Fleet Financial– BoA down $8.29, or 10%, BFF rose 23%
Anthem – WellPoint Health Networks– Anthem down 8.2%, WellPoint up 8.8%
United Health – MidAtlantic Med Services– UH down 4.9%, MAMS up 9.7%
Failures of Acquisitions30 - 40% average acquisition premium
Acquiring firm’s value drops 4% in the 3 months following acquisitions
30 - 50% of acquisitions are later divested
Acquirers underperform S&P by 14%, peers by 4%
3 month performance before and after– 30% substantial losses, 20% some losses, 33%
marginal returns, 17% substantial returns
Why, then, do executives acquire?
Often, for personal reasons
Firm size and executive compensation are related
When do executives loss their jobs?– 1) Acquired - larger firms harder to acquire– 2) Performing poorly - employment risk is
reduced as returns are less volatile
Levels of Diversification
Single Business Unit - vast majority of sales comes from a single business
Less ambiguity
Ear to the ground re: industry and competition
Eggs in one basket
Related Diversification at Disney
Entertainment/Production
Theme Parks
Resorts
Entertainment/Broadcasting
Cruise Lines
Retailing
Levels of Diversification (cont.)
Related Diversification - entering product markets that share some resource or capability requirements with the current business – horizonal relationships across businesses
Advantages of related diversification include: Leveraging Core Competencies Sharing Activities Market Power Vertical Integration - integration of preceding or
successive productive processes - Shaw Industries buying a fiber company or floor covering retailer.
Vertical Integration
Benefits
– can not be held hostage – reduces buyer/supplier power
– greater control over operations
– access to new business/technologies
– reduce procurement and sales efforts
Risks
– increased overhead, capital and administrative costs
– loss of flexibility
– unbalanced capacities
– reaction of competitors
Tyco ElectronicsTyco Telecommunications
Tyco Fire and SecurityTyco Safety Products
Tyco HealthcareTyco Plastics
Tyco AdhesivesTyco Flow Control
Tyco Electrical and Metal ProductsTyco Fire and Building Products
Tyco Infrastructure Services
Tyco
Limits itself to businesses that can be held strictly accountable for a few key financial measures
Mature, stable, low-tech industries which face certain environments and little R&D investments
Levels of Diversification (cont.)
Unrelated Diversification - few similarities in the resources and capabilities required among the firm’s businesses
Conglomerate Diversification - no relatedness between businesses
Unrelated/Conglomerate DiversificationAttempts to create value through the management of
vertical relationships among the businesses
Approve plans and budgets, competent legal, financial, accounting, HR or other support function
Effective control systems
Restructuring - buy low, sell high– spinoffs– turnaround
Creating Value through Restructuring
Good, consistent job of making good investments
Favorable negotiations
Shrewd selling at the top
Shifting investment to high growth/return businesses
When/Why to Diversify?
To create shareholder value
Porter’s Three Point Test
1) Attractiveness Test
2) Cost of Entry Test
3) Better off Test
Should pass all 3
Portfolio analysis
BCG Growth-Share Matrix– question marks, dogs, cash cows, stars
GE- Nine Cell Matrix
Gro
wth
Rat
eRelative Market Share
StarsQuestion
Marks
CashCows
Dogs
Boston Consulting Group Matrix
Gro
wth
Rat
e
Relative Market Share
1.0High Low
Soft Drinks
FritoLay
KFC
PizzaHut
TacoBell
Low
High
10%
BCG Matrix for PepsiCo - Early 1990s
Gro
wth
Rat
e
Relative Market Share
.75High Low
Soft Drinks
FritoLay
KFC
PizzaHutTaco
Bell
Low
High
5%
BCG Matrix for PepsiCo - Early 1990s
Competitive StrengthsA
ttra
ctiv
enes
s
Invest Grow
Low
High
LowHigh
HarvestDivest
Hold
GE 9 Cell Matrix
Competitive StrengthsA
ttra
ctiv
enes
s
Low
High
LowHigh
GE 9 Cell Matrix for Pepsico
Soft Drinks
Snack Foods
GM provides health care for 1.1 million workers and retirees, which adds about $1,500 to the average cost of every vehicle it sells in the U.S.
For 2005, GM has forecast $5.6 billion in health-care costs, up about $1 billion from 2004. It has blamed its recent fall in profit on the rising cost of providing medical care for workers and retirees.
United does offer more space in its Economy Plus seats. But only travelers who pay full fare or who are elite members of the miles program can get them. Its regular economy-class seats measure in at 31 inches of seat pitch.
Board of Directors
Governance mechanism of owners to oversee, evaluate and ratify the actions of management– setting corporate strategy, direction, mission,
values– hire/fire CEO/TMT– control, monitor, supervise TMT– review/approve resource allocations– protect shareholders interests
Board of Directors
Sam Nunn- ex-Senator from Georgia sits on Coke’s and Dell’s Board
Nancy Reagan sat on Revlon’s board
Hank Aaron sat on Coke’s board
Sally Ride sat on three boards
Martha Stewart and Kim Alexis sat on Drugstore.com
Al Haig and Colin Powell sat on AOL’s board
Board Involvement
Mostly little or no involvement
Boards tend to be dominated by management
Keys to board power– CEO/Chairman duality– insiders vs. outsiders
• outsiders often weak, unknowledgeable
– effective board process
Trends in Governance
Institutional investors becoming increasingly powerful
Special interests groups and social institutional owners
Internationalization of board composition
Presiding and Lead Directors – 1/3 of S&P 500 – Presiding run meetings sans CEOs, Leads are actively involved
Median CEO pay rose 14% to $13.2 million is a year when S&P was down over 22%
One company’s stock slides 71%, CEO compensation falls 12%
….. to only $82 million
….. Dennis Kozlowski – Tyco’s frequently indicted CEO
….. which is not as bad as what the CFO made - $136 million
Bob Nardelli at HD has a “target bonus” minimum of $3 million and could get as much as $82 million upon his exit.
James McNerney – “cause shall not include any one or more of the following: bad judgment or negligence.”
Executive Compensation - 2002
Steve Jobs, Apple 78.1M -34.6
David Cote, Honeywell
68.5M -27.3%
John Chamber, Cisco 54.8M -27.7
Pat Russo, Lucent 38.2M -75.4%
Scott McNealy, Sun Microsystems
31.7M -74.7%
Executive Compensation
Aligning the interests of shareholders and managers by rewarding them for pursuing their interests
Peter Drucker - “There are only bad and worse executive compensation packages. Most encourage the top management to milk the company”
Warren Buffett - “...mediocre CEOs are getting incredibly overpaid”
Top execs make over 200 times the average worker, up from 44 only 30 years ago.
Executive Compensation
Bonuses, incentives and stock ownership
– difficulty in evaluating decision making
• financial objectives used
– lengthy feedback period
– beyond managerial control
– managerial manipulation
Stock Options
– riding the stock market wave
– strike period is too long
– growth, not cost-cutting, should be rewarded
– require holding the stock after exercise
– make exercise conditional on certain criteria
Corporate Social Performance
• Friedman – “The Social Responsibility of Business Is to Increase Its Profits“
• Corporations as Citizens• Corporations dependent upon its stakeholders• Corporations that are attentive to its stakeholders
can gain competitive advantages• Corporations, which control resources beyond
those held by individuals, have an even greater responsibility to be “good citizens”
Related Documents
