July 2, 1999 July 2, 1999 Corporate Level Strategy Ian Lee, Ph.D Carleton University School of Business July 2, 1999 July 2, 1999 Corporate Strategy • Vertical integration (scale) • Horizontal diversification (scope) • International diversification • M&A versus Strategic Alliances July 2, 1999 July 2, 1999 Jack Welch, CEO-GE When I was younger I thought there was a room where all the strategic concepts were worked out for the entire company. Only later did I realize there was no such room and that the strategy does not even exist in the mind of any one person. It is simply transmitted in a series of decisions made.
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July 2, 1999July 2, 1999
Corporate Level Strategy
Ian Lee, Ph.DCarleton UniversitySchool of Business
July 2, 1999July 2, 1999
Corporate Strategy
• Vertical integration (scale)
• Horizontal diversification (scope)
• International diversification
• M&A versus Strategic Alliances
July 2, 1999July 2, 1999
Jack Welch, CEO-GEWhen I was younger I thought there
was a room where all the strategic concepts were worked out for the entire company.
Only later did I realize there was no such room and that the strategy does not even exist in the mind of any one person. It is simply transmitted in a series of decisions made.
July 2, 1999July 2, 1999
Grandmother’s Advice
• Eat your brocolli!
• Why? Because its good for you
• Why is it good for me?
• Because my grandmother told me
July 2, 1999July 2, 1999
American Medical Research
• Brocolli is good for you
• Why?
• Because SGH is an anti-carcinogen
• found in high quantities in brocolli
July 2, 1999July 2, 1999
Coca Cola Manager, Prague
• Corporate Strategy is very useful
• because now I know WHY
• my Head Office chose the strategies it chose
July 2, 1999July 2, 1999
When an industry with a reputation for
difficult economics meets a manager with
a reputation for excellence, it is usually
the industry that keeps its reputation
intact.
Warren BuffetWarren Buffet
July 2, 1999July 2, 1999
Diversified Company has Diversified Company has 22 levels of strategylevels of strategy
July 2, 1999July 2, 1999
CorporateCorporate--Level Strategy Level Strategy (Company(Company--wide Strategy)wide Strategy)
Diversified Company has Diversified Company has 22 levels of strategylevels of strategy
BusinessBusiness--Level Strategy Level Strategy (Competitive Strategy)(Competitive Strategy)
July 2, 1999July 2, 1999
How to create CA in each BU in which firm competesHow to create CA in each BU in which firm competes
Diversified Company has Diversified Company has 22 levels of strategylevels of strategy
BusinessBusiness--Level Strategy Level Strategy (Competitive Strategy)(Competitive Strategy)
July 2, 1999July 2, 1999
- low cost- differentiation- integrated low cost/differentiation
- low cost- differentiation- integrated low cost/differentiation
- focused low cost- focused differentiation- focused low cost- focused differentiation
A Diversified Company has A Diversified Company has 22 levels of strategylevels of strategy
How to create CA in each BU in which firm competesHow to create CA in each BU in which firm competes
BusinessBusiness--Level Strategy Level Strategy (Competitive Strategy)(Competitive Strategy)
July 2, 1999July 2, 1999
- low cost- differentiation- integrated low cost/differentiation
-- low costlow cost-- differentiationdifferentiation-- integrated low cost/differentiationintegrated low cost/differentiation
- focused low cost- focused differentiation-- focused low costfocused low cost-- focused differentiationfocused differentiation
How to create value for corporation as a wholeHow to create value for corporation as a whole
A Diversified Company has A Diversified Company has 22 levels of strategylevels of strategy
How to create CA in each BU in which competesHow to create CA in each BU in which competesHow to create CA in each BU in which competes
CorporateCorporate--Level Strategy Level Strategy (Company(Company--wide Strategy)wide Strategy)
BusinessBusiness--Level Strategy Level Strategy (Competitive Strategy)(Competitive Strategy)
July 2, 1999July 2, 1999
Purpose of Corporate Strategy
• Maximize shareholder value
• why?
• Who cares?
• Why value value?
July 2, 1999July 2, 1999
Valuing Value Creation
• Why are some country’s rich?
• Why care if some business people are rich?
• Why should employees care?
July 2, 1999July 2, 1999
Valuing Value Creation
• Shareholder wealth is a residual
• maximize it - you maximize all stakeholders
• capital flows to returns i.e. more profitable firms & countries
July 2, 1999July 2, 1999
Stakeholder InvolvementEach of the key stakeholders involved wants a piece of the same pie
1 How do you divide the pie in order to keep all stakeholders involved?
How do you divide the pie in order to keep all stakeholders involved?
2
How do you increase the size of pie so that there is more to go around?
How do you increase the size of pie so that there is more to go around?
July 2, 1999July 2, 1999
Corporate Strategy concerns Corporate Strategy concerns 22 key questions:key questions:
July 2, 1999July 2, 1999
What What businessesbusinesses should corporation be in?should corporation be in?
Corporate Strategy concerns Corporate Strategy concerns 22 key questions:key questions:
July 2, 1999July 2, 1999
What What businessesbusinesses should corporation be in?should corporation be in?
How should Head Office How should Head Office managemanage array of array of BUsBUs??
Corporate Strategy concerns Corporate Strategy concerns 22 key questions:key questions:
July 2, 1999July 2, 1999
What What businessesbusinesses should the corporation be in?should the corporation be in?
How should Head Office How should Head Office managemanage its its BUsBUs??
Corporate Strategy = corporate whole add up to > Corporate Strategy = corporate whole add up to > sum of its BU partssum of its BU parts
Corporate Strategy concerns Corporate Strategy concerns 22 key questions:key questions:
July 2, 1999July 2, 1999
Corporate Strategy
• diversified firm is COLLECTION of individual businesses (BUs)
• Corp.Strat. should create Corporate Advantage (Cynthia Montgomery)
• or Parenting Advantage (Goold/Campbell)
July 2, 1999July 2, 1999
Corporate Strategy & Diversification
• In diversified firm, corporate mgrs must craft a MULTI-BUSINESS, MULTI-INDUSTRY strategy for
– different businesses
– competing in
– diverse industry environments
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Focus of Corporate Strategy
1. Diversification strategies– internal growth, acquisitions, alliances
2. economies of scope– i.e. strategic fit, synergy
3. corporate governance– i.e. corporate-business relationship
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Main Tasks for Corporate Strategy• choose scope of diversification
– horizontal– vertical– international
• choose strategy of diversification– acquisition– growth from within– strategic alliance
• oversee LR performance of firm’s businesses
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Corporate Strategies - Scale
• Growth (internal, acquisition, alliance)
• stability
• retrenchment (turnaround, divest, liquidate)
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Corporate Strategies - Scope
• vertical integration (backward/forward or upstream/downstream)
• horizontal diversif (related or unrelated)
• international diversification
July 2, 1999July 2, 1999
Corporate Strategies - International
• Exporting• Licensing• Joint ventures (alliances)• Acquisitions• Green-field development• Production sharing
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Synergy
• Synergy from Greek word “synergos”
• i.e. working together
• 2 or more BUs or divisions to create more S/H value
• than as separate firms
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Synergy
• Synergy = economies of scope
• economies of scope = strategic fit
• strategic fit = closely related businesses
• closely related businesses = scope economies = synergy
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Economies of Scope• eliminate costs by operating 2 or more
businesses under same corporate umbrella
• Exist when less costly for 2 or more businesses to operate under centralized mgmt
• Cost savings from interrelationships anywhere along businesses’ VCs
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Goold & Campbell: 6 Types of Synergy
1. Shared know-how
2. Shared tangible resources
3. Pooled negotiating power
4. Coordinated strategies
5. Vertical integration
6. Combined business creation
July 2, 1999July 2, 1999
Value Chains are part of a Total Value SystemValue Chains are part of a Total Value SystemSupplier VC Firm VCFirm VC Channel VC Buyer VC
July 2, 1999July 2, 1999
Value Chains are part of a Total Value SystemValue Chains are part of a Total Value SystemFirm VC Channel VC Buyer VC
Supplier VCSupplier VC
Upstream ValueUpstream Value
Perform valuable activities that complement the firm’s activities
July 2, 1999July 2, 1999
Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification
July 2, 1999July 2, 1999
Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification
Single-businessSingle-business > 95% revenues from single BU> 95% revenues from single BULow Levels of DiversificationLow Levels of Diversification
Dominant-businessDominant-business Between 70% & 95% of revenues Between 70% & 95% of revenues from single BUfrom single BU
July 2, 1999July 2, 1999
Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification
SingleSingle--businessbusiness > 95% revenues from single BU> 95% revenues from single BULow Levels of DiversificationLow Levels of Diversification
DominantDominant--businessbusiness Between 70% & 95% of revenues Between 70% & 95% of revenues from single BUfrom single BU
Related-DiversifiedRelated-Diversified <70% revenues from single BU<70% revenues from single BUModerate to High Levels of DiversificationModerate to High Levels of Diversification
BUsBUs share product, technoshare product, techno--logical logical or distribution linkagesor distribution linkages
July 2, 1999July 2, 1999
Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification
SingleSingle--businessbusiness > 95% revenues from single BU> 95% revenues from single BULow Levels of DiversificationLow Levels of Diversification
DominantDominant--businessbusiness Between 70% & 95% of revenues Between 70% & 95% of revenues from single BUfrom single BU
RelatedRelated--DiversifiedDiversified <70% revenues from single BU<70% revenues from single BUModerate to High Levels of DiversificationModerate to High Levels of Diversification
Businesses share product, technoBusinesses share product, techno--logical or distribution linkageslogical or distribution linkages
Unrelated-DiversifiedUnrelated-Diversified BUsBUs not closely related not closely related High Levels of DiversificationHigh Levels of Diversification
July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
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Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs atCompetition occurs at business unitbusiness unit levellevel
Premises of Corporate StrategyPremises of Corporate Strategy
July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs atCompetition occurs at BU levelBU levelDiversified firms do not compete with each otherDiversified firms do not compete with each other----only their only their BUsBUs compete.compete.
Premises of Corporate StrategyPremises of Corporate Strategy
July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs at BU levelCompetition occurs at BU levelDiversified firms do not compete with each otherDiversified firms do not compete with each other----only their only their BUs BUs compete.compete.
Diversification adds costs & constraints to Diversification adds costs & constraints to BUsBUs
July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs at BU levelCompetition occurs at BU levelDiversified firms do not compete with each otherDiversified firms do not compete with each other----only their only their BUsBUs compete.compete.
DiversificationDiversification adds costs & constraints to adds costs & constraints to BUsBUs
Corporate overheadCorporate overheadCommunication between Communication between BUsBUs & top mgmt& top mgmtNo direct equity ownership by employeesNo direct equity ownership by employees
July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs at BU levelCompetition occurs at BU levelDiversified firms do not compete with each otherDiversified firms do not compete with each other----only their only their BUsBUs compete.compete.
Diversification adds costs and constraints to BUDiversification adds costs and constraints to BU
Corporate overheadCorporate overheadCommunication between BU & top mgmtCommunication between BU & top mgmtNo direct equity ownership by employeesNo direct equity ownership by employees
ShareholdersShareholders can can diversifydiversify more cheaply for themselvesmore cheaply for themselves
July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs at the BU levelCompetition occurs at the BU levelDiversified firms do not compete with each otherDiversified firms do not compete with each other----only their only their BUsBUs compete.compete.
Diversification adds costs & constraints to Diversification adds costs & constraints to BUsBUs
Corporate overheadCorporate overheadCommunication between Communication between BUsBUs and top mgmtand top mgmtNo direct equity ownership by employeesNo direct equity ownership by employees
ShareholdersShareholders can can diversifydiversify more cheaply for themselvesmore cheaply for themselvesShareholders can buy shares at Shareholders can buy shares at mktmkt price & avoid price & avoid paying large acquisitionpaying large acquisition premiapremia
July 2, 1999July 2, 1999
Implications for these PremisesImplications for these Premises
Corporate Strategy cannot succeed unlessCorporate Strategy cannot succeed unless adds adds value to value to BUsBUs::
July 2, 1999July 2, 1999
Implications for these PremisesImplications for these Premises
by providingby providing tangible benefits that offset tangible benefits that offset inherent costs inherent costs of lost independenceof lost independence
Corporate Strategy cannot succeed unless adds Corporate Strategy cannot succeed unless adds value to value to BUsBUs::--
July 2, 1999July 2, 1999
Implications for these PremisesImplications for these Premises
by providing tangible benefits that offset by providing tangible benefits that offset inherent costs of lost independenceinherent costs of lost independence
add value to shareholders in a way that add value to shareholders in a way that shareholders could not replicate by themselvesshareholders could not replicate by themselves
Corporate Strategy cannot succeed truly adds Corporate Strategy cannot succeed truly adds value to value to BUsBUs::
--
--
July 2, 1999July 2, 1999
Adding Value by DiversificationAdding Value by Diversification
Diversification most effectively adds value by Diversification most effectively adds value by either of 2 mechanismseither of 2 mechanisms
July 2, 1999July 2, 1999
Adding Value by DiversificationAdding Value by Diversification
By developing economies of scope between By developing economies of scope between BUs BUs which leads to synergistic benefitswhich leads to synergistic benefits
Diversification most effectively adds value by Diversification most effectively adds value by either of 2 mechanismseither of 2 mechanisms
July 2, 1999July 2, 1999
Adding Value by DiversificationAdding Value by Diversification
By developing economies of scope between By developing economies of scope between BUsBUswhich leads to synergistic benefitswhich leads to synergistic benefits
By developing market power which lead to By developing market power which lead to greater returnsgreater returns
Diversification most effectively adds value by Diversification most effectively adds value by either of two mechanismseither of two mechanisms
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Sharing ActivitiesSharing Activities
Corporate Strategy: Reasons to DiversifyCorporate Strategy: Reasons to Diversify
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
RestructuringRestructuring
Related Diversification Strategies
Unrelated Diversification Strategies
11
22
33
44
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Corporate Strategy: Reasons to DiversifyCorporate Strategy: Reasons to Diversify
Related Diversification Strategies
11
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Key Characteristics
Sharing Activities often Sharing Activities often lowers costslowers costs or or raisesraises differentiationdifferentiation
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Key Characteristics
Sharing Activities often lowers costs or raises differentiationSharing Activities often lowers costs or raises differentiationExampleExample: Using common physical distribution system & : Using common physical distribution system & sales force such as Procter & Gamble’s disposable sales force such as Procter & Gamble’s disposable diaper & paper towel divisionsdiaper & paper towel divisions
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Key Characteristics
Sharing Activities often lowers costs or raises differentiationSharing Activities often lowers costs or raises differentiation
Sharing Activities can lower costs if it:Sharing Activities can lower costs if it:
ExampleExample: Using common physical distribution system & : Using common physical distribution system & sales force such as P&’s disposable diaper & paper sales force such as P&’s disposable diaper & paper towel divisionstowel divisions
** Achieves economies of scaleAchieves economies of scale** Boosts efficiency of utilizationBoosts efficiency of utilization** Helps move more rapidly down Learning CurveHelps move more rapidly down Learning Curve
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Key Characteristics
Sharing Activities often lowers costs or raises differentiationSharing Activities often lowers costs or raises differentiation
Sharing Activities can lower costs if it:Sharing Activities can lower costs if it:
ExampleExample: Using common physical distribution system & : Using common physical distribution system & sales force such as P&G’s disposable diaper & paper sales force such as P&G’s disposable diaper & paper towel divisionstowel divisions
** Achieves economies of scaleAchieves economies of scale** Boosts efficiency of utilizationBoosts efficiency of utilization** Helps move more rapidly down Learning CurveHelps move more rapidly down Learning Curve
ExampleExample: GE’s costs to advertise, sell & service major : GE’s costs to advertise, sell & service major appliances spread over many different productsappliances spread over many different products
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Sharing Activities can enhance potential for or reduce cost Sharing Activities can enhance potential for or reduce cost of differentiationof differentiation
Key Characteristics
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Sharing Activities can enhance potential for or reduce cost Sharing Activities can enhance potential for or reduce cost of differentiationof differentiation
ExampleExample: Shared order processing system may allow new : Shared order processing system may allow new features which customers value or make more advanced features which customers value or make more advanced remote sensing technology availableremote sensing technology available
Key Characteristics
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Sharing Activities can enhance potential for or reduce cost Sharing Activities can enhance potential for or reduce cost of differentiationof differentiation
Must involve activitiesMust involve activities crucial to CAcrucial to CA
ExampleExample: Shared order processing system may allow new : Shared order processing system may allow new features customers value or make more advanced remote features customers value or make more advanced remote sensing technology availablesensing technology available
Key Characteristics
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Sharing Activities can enhance potential for or reduce cost Sharing Activities can enhance potential for or reduce cost of differentiationof differentiation
Must involve activities crucial to CAMust involve activities crucial to CA
ExampleExample: Shared order processing system may allow new : Shared order processing system may allow new features customers value or make more advanced remote features customers value or make more advanced remote sensing technology availablesensing technology available
ExampleExample: P&G’s sharing of sales & physical distribution : P&G’s sharing of sales & physical distribution for disposable diapers and paper towels effective because for disposable diapers and paper towels effective because these items are bulky & costly to shipthese items are bulky & costly to ship
Key Characteristics
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Corporate Strategy: Reasons to DiversifyCorporate Strategy: Reasons to Diversify
Related Diversification Strategies
22
Sharing ActivitiesSharing Activities11
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Key Characteristics
** Exploits Exploits InterrelationshipsInterrelationships among divisionsamong divisions
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Key Characteristics
** Exploits Exploits InterrelationshipsInterrelationships among divisionsamong divisions
** Start with Start with Value ChainValue Chain analysisanalysis
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Key Characteristics
** Exploits Exploits InterrelationshipsInterrelationships among divisionsamong divisions
** Start with Start with VCVC analysisanalysis
ID ability to transfer skills or expertise ID ability to transfer skills or expertise among similar VCsamong similar VCs
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Key Characteristics
** Exploits Exploits InterrelationshipsInterrelationships among divisionsamong divisions
** Start with Start with VCVC analysisanalysis
ID ability to transfer skills or expertise ID ability to transfer skills or expertise among similar VCsamong similar VCs
Exploit ability to Exploit ability to share activitiesshare activities
2 firms can share same sales force, logistics 2 firms can share same sales force, logistics network or distribution channelsnetwork or distribution channels
July 2, 1999July 2, 1999
AssumptionsTransferring CC leads to CA only if similarities among Transferring CC leads to CA only if similarities among BUsBUs meet meet following conditions:following conditions:
Activities involved in Activities involved in BUsBUs are similar are similar enufenuf that that sharing expertise is meaningfulsharing expertise is meaningful
11
Transferring Core CompetenciesTransferring Core Competencies
July 2, 1999July 2, 1999
AssumptionsTransferring CC leads to CA only if similarities among Transferring CC leads to CA only if similarities among BUsBUs meet meet following conditions:following conditions:
Activities involved in Activities involved in BUsBUs are similar are similar enufenuf that that sharing expertise is meaningfulsharing expertise is meaningful
11
22 Transfer of skills involves activitiesTransfer of skills involves activities important important to CAto CA
Transferring Core CompetenciesTransferring Core Competencies
July 2, 1999July 2, 1999
AssumptionsTransferring CC leads to CA only if similarities among Transferring CC leads to CA only if similarities among BUsBUs meet meet following conditions:following conditions:
Activities involved in Activities involved in BUsBUs are similar are similar enufenuf that that sharing expertise is meaningfulsharing expertise is meaningful
11
22
33
Transfer of skills involves activities which are Transfer of skills involves activities which are important to competitive advantageimportant to competitive advantage
Skills transferred represent significant sources of Skills transferred represent significant sources of CA for receiving unitCA for receiving unit
Transferring Core CompetenciesTransferring Core Competencies
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Sharing ActivitiesSharing Activities
Corporate Strategy Corporate Strategy -- Reasons to DiversifyReasons to Diversify
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
Related Diversification Strategies
Unrelated Diversification Strategies
11
22
33
July 2, 1999July 2, 1999
Key CharacteristicsFirms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
July 2, 1999July 2, 1999
Key CharacteristicsFirms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
Acquired Acquired BUsBUs are autonomousare autonomous
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
July 2, 1999July 2, 1999
Key CharacteristicsFirms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
Acquired Acquired BUsBUs are autonomousare autonomous
Acquiring corporation supplies needed KAcquiring corporation supplies needed K
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
July 2, 1999July 2, 1999
Key CharacteristicsFirms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
Acquired Acquired BUsBUs are autonomousare autonomous
Acquiring corporation supplies needed K Acquiring corporation supplies needed K
Portfolio managers transfer resources from Portfolio managers transfer resources from BUsBUs that that generate cash to those with high growth potential & generate cash to those with high growth potential & substantial cash needssubstantial cash needs
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
July 2, 1999July 2, 1999
Key CharacteristicsFirms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
Acquired Acquired BUsBUs are autonomousare autonomous
Acquiring corporation supplies needed KAcquiring corporation supplies needed K
Portfolio managers transfer resources from Portfolio managers transfer resources from BUsBUs that that generate cash to those with high growth potential and generate cash to those with high growth potential and substantial cash needssubstantial cash needsAdd professional management & control to Add professional management & control to BUsBUs
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
July 2, 1999July 2, 1999
Key CharacteristicsFirms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
Acquired Acquired BUsBUs are autonomousare autonomous
Acquiring corporation supplies needed KAcquiring corporation supplies needed K
Portfolio managers transfer resources from units that Portfolio managers transfer resources from units that generate cash to those with high growth potential and generate cash to those with high growth potential and substantial cash needssubstantial cash needsAdd professional management & control to Add professional management & control to BUsBUs
BU mgrs compensation based on BU resultsBU mgrs compensation based on BU results
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
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Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
Assumptions
Mgrs have more detailed knowledge of firm visMgrs have more detailed knowledge of firm vis--aa--vis vis outside investorsoutside investors
July 2, 1999July 2, 1999
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
Assumptions
Mgrs have more detailed knowledge of firm visMgrs have more detailed knowledge of firm vis--aa--vis vis outside investorsoutside investors
Firm need not risk competitive edge by disclosing Firm need not risk competitive edge by disclosing sensitive competitive info to investorssensitive competitive info to investors
July 2, 1999July 2, 1999
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
Assumptions
Mgrs have more detailed knowledge of firm visMgrs have more detailed knowledge of firm vis--aa--vis vis outside investorsoutside investors
Firm can reduce risk by allocating resources among Firm can reduce risk by allocating resources among diversified businesses, diversified businesses, althoaltho shareholders can generally shareholders can generally diversify more economically on their owndiversify more economically on their own
Firm need not risk competitive edge by disclosing Firm need not risk competitive edge by disclosing sensitive competitive info to investorssensitive competitive info to investors
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Sharing ActivitiesSharing Activities
Corporate Strategy Corporate Strategy -- Reasons to DiversifyReasons to Diversify
Efficient Internal K Efficient Internal K MktMkt AllocationAllocation
RestructuringRestructuring
Related Diversification Strategies
Unrelated Diversification Strategies
11
22
33
44
July 2, 1999July 2, 1999
RestructuringRestructuring
Key Characteristics
Seek out undeveloped, sick or threatened firms or Seek out undeveloped, sick or threatened firms or industriesindustries
July 2, 1999July 2, 1999
RestructuringRestructuring
Key Characteristics
Seek out undeveloped, sick or threatened organizations Seek out undeveloped, sick or threatened organizations or industriesor industriesParent company (acquirer) intervenes& frequently:Parent company (acquirer) intervenes& frequently:-- Changes BU mgmt teamChanges BU mgmt team-- Shifts strategyShifts strategy-- Infuses firm with new technologyInfuses firm with new technology
-- Divests part of firmDivests part of firm-- Makes additional acquisitions to achieve critical massMakes additional acquisitions to achieve critical mass
-- Enhances discipline by changing control systemsEnhances discipline by changing control systems
July 2, 1999July 2, 1999
Key Characteristics
Seek out undeveloped, sick or threatened organizations Seek out undeveloped, sick or threatened organizations or industriesor industries
Frequently sell BU after making 1Frequently sell BU after making 1--time changes since time changes since parent no longer adds value to ongoing operationsparent no longer adds value to ongoing operations
RestructuringRestructuring
Parent company (acquirer) intervenes and frequently:Parent company (acquirer) intervenes and frequently:-- Changes BU mgmt teamChanges BU mgmt team-- Shifts strategyShifts strategy-- Infuses firm with new technologyInfuses firm with new technology
-- Divests part of firmDivests part of firm-- Makes additional acquisitions to achieve critical massMakes additional acquisitions to achieve critical mass
-- Enhances discipline by changing control systemsEnhances discipline by changing control systems
July 2, 1999July 2, 1999
Assumptions
Requires keen mgmt insight to select firms with Requires keen mgmt insight to select firms with depressed values or unforeseen potentialdepressed values or unforeseen potential
RestructuringRestructuring
July 2, 1999July 2, 1999
Assumptions
Requires keen mgmt insight to select firms with Requires keen mgmt insight to select firms with depressed values or unforeseen potentialdepressed values or unforeseen potential
Must do more than restructure companiesMust do more than restructure companies
Need to initiate restructuring of industries to Need to initiate restructuring of industries to create more attractive environmentcreate more attractive environment
RestructuringRestructuring
July 2, 1999July 2, 1999
During 1970s, consulting firms popularized portfolio During 1970s, consulting firms popularized portfolio matrix techniques to evaluate firm’s mix of businessesmatrix techniques to evaluate firm’s mix of businesses
BCG matrix BCG matrix focused on relative focused on relative mktmkt share & segment share & segment growthgrowth
Portfolio Matrix Analysis TechniquesPortfolio Matrix Analysis Techniques
July 2, 1999July 2, 1999
During 1970s, consulting firms popularized portfolio During 1970s, consulting firms popularized portfolio matrix techniques to evaluate firm’s mix of businessesmatrix techniques to evaluate firm’s mix of businesses
BCG matrix focused on relative BCG matrix focused on relative mktmkt share & segment share & segment growthgrowth
These techniques now largely discredited because they These techniques now largely discredited because they led to excessive focus on shifting financial resources & led to excessive focus on shifting financial resources & lacked strategic insight for diversification decisionslacked strategic insight for diversification decisions
Portfolio Matrix Analysis TechniquesPortfolio Matrix Analysis Techniques
July 2, 1999July 2, 1999
July 2, 1999July 2, 1999
Note on Diversification
Michael Porter
July 2, 1999July 2, 1999
Porter
• Porter studied diversification efforts 1950-86
• divestment rate for unrelated acquisitions was 74%
• mkt shows unrelated diversification a failure
July 2, 1999July 2, 1999
Porter’s Diversification Tests
1. attractiveness test
2. cost of entry test
3. better off test
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1. Attractiveness Test
• shd only diversify into attractive industries
• attractive means high entry barriers, modest buyer and supplier power, weak substitutes and stable rivalry
• often use rapid growth as proxy for attractiveness - not so
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2. Cost of Entry Test
• entry costs must not capitalize future profits
• more attractive a firm, higher purchase cost
• higher entry barriers for attractive industries
July 2, 1999July 2, 1999
3. Better Off Test
• either new unit must obtain CA from its link with corporate or vice versa
• not = diversifying corp risk to create S/V
• diversification of risk should be by-product of corporate strategy - not driver
• CEOs confuse firm size with S/V
July 2, 1999July 2, 1999
Porter’s Corporate Strategy Advice
1. identify interrelationships among SBUs
2.select core business that are foundation of core strategy among SBUs
3.create horizontal mechanisms to facilitate interrelationships among core businesses
July 2, 1999July 2, 1999
Porter’s Corporate Strategy
4.locate diversification activities that allow shared activities
5.pursue diversif thro transfer of skills if opportunities for sharing activities used up
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