strategy slides ch 06

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					      Chapter 6

Corporate-Level Strategy:
 Creating Value through
     Diversification
        Discussion Objectives
1. How corporations can use related diversification to
   achieve synergistic benefits through economies of
   scope and market power.

2. How corporations can use unrelated diversification
   to attain synergistic benefits

3. The various means of engaging in diversification

4. Managerial behaviors that can erode the creation of
   value.
Does Diversification Make Sense
Research indicates that diversification is
generally a bad idea:
– Between 33% and 50% of corporate
  diversification efforts end up as divestitures.

– Companies typically pay 30% to 40%
  premiums to acquire target companies.

– All of us can diversify our own portfolios very
  easily and efficiently
          Key Questions
Corporate level strategy is concerned with
two key questions:
– What businesses should a corporation
  compete in?


– How should these businesses be managed to
  jointly create more value than if they were
  freestanding units (synergy)?
      Diversification Efforts
Diversification initiatives must create value
for shareholders
– Mergers and acquisitions
– Strategic alliances
– Joint ventures
– Internal development

Diversification should create synergy
– Shared value
                    Synergy
Related businesses - Horizontal relationships
–   Sharing intangible resources
–   Sharing tangible resources
–   Pooled negotiating power
–   Vertical integration


Unrelated businesses.
– Hierarchical relationships - value creation derived
  from the corporate office.
– Leveraging support activities in the value chain
Related Diversification – Economies of Scope

Economies of scope - Cost savings from
leveraging core competencies or sharing
related activities among businesses in the
corporation
– Leverage or reuse key resources
– Favorable reputation
– Expert staff
– Management skills
– Efficient purchasing operations
 RD – Leveraging Core Competencies.

Leveraging Core competencies
– Core competencies reflect the collective
  learning in organizations
– How to coordinate diverse production skills,
  integrate multiple streams of technologies,
  and market and merchandise diverse
  products and services.


Examples?
         RD – Leveraging Cont.
  Core competencies must meet three criteria

1. The core competence must enhance competitive
   advantage(s) by creating superior customer value.

2. Different businesses in the corporation must be similar in
   at least one important way related to the core
   competence.

3. The core competencies must be difficult for competitors
   to imitate or find substitutes for.
     RD - Sharing Activities
Sharing Activities - Corporations can also
achieve synergy by sharing tangible and value-
creating activities across their business units
     Common manufacturing facilities
     Distribution channels
     Sales forces
– Sharing activities provide two payoffs
     Cost savings
     Revenue enhancements
Why do shared activities not lead to these
benefits?
RD – Pooled Negotiating Power
Pooled negotiating power - Similar businesses working
together can have stronger bargaining position relative to
      Suppliers
      Customers
      Competitors


Abuse of bargaining power may affect relationships with
customers, suppliers and competitors

What are some other downsides to pooled negotiating
power??
   RD - Vertical Integration.
Benefits
– Secure source of supply of raw materials

– Secure distribution channels

– Protection and control over assets and services

– Access to new business opportunities and
  technologies

– Simplified procurement and administrative procedures
RD – Vertical Integration Cont.
Risks
– Costs and expenses associated with increased
  overhead and capital expenditures

– Loss of flexibility resulting from inability to respond
  quickly to changes in the external environment

– Problems associated with unbalanced capacities or
  unfilled demand along the value chain

– Additional administrative costs
RD – Vertical Integration Cont.
Six issues to consider:
1. Are we satisfied with the quality of the value that our
  present suppliers and distributors are providing?

2. Are there activities in our industry value chain
  presently being outsourced or performed
  independently by others that are a viable source of
  future profits?

3. Is there a high level of stability in the demand for the
  organization’s products?
RD –Vertical Integration Cont.
Six Issues to consider
4. How high is the proportion of additional production
  capacity actually absorbed by existing products or by
  the prospects of new and similar products?

5. Does the company have the necessary competencies
  to execute the vertical integration strategies?

6. Will the vertical integration initiative have potential
  negative impacts on the firm’s stakeholders?
RD – Vertical Integration Cont.
Transaction Cost Perspective – VI makes sense
if the sum of transaction costs to acquire a
product are more than the costs of
manufacturing it internally.
     Search costs
     Negotiation costs
     Contracting costs
     Monitoring costs
     Enforcement costs


Transaction Specific Investments
Transaction costs versus administrative costs
   Unrelated Diversification
Most benefits from unrelated
diversification are gained from vertical
(hierarchical) relationships
– Parenting and restructuring of businesses -
  Allocate resources to optimize
    Profitability
    Cash flow
    Growth
– Appropriate human resource practices
– Financial controls
UD – Parenting & Restructuring
Corporate management must
 – Have insight to detect undervalued companies or
   businesses with high potential for transformation
 – Have requisite skills and resources to turn the
   businesses around


Restructuring can involve changes in
 – Assets
 – Capital structure
 – Management
UD – Portfolio Management
  UD – Portfolio MNGT cont.
Creation of synergies and shareholder value by portfolio
management and the corporate office
– Allocate resources (cash cows to stars and some question
  marks)

– Expertise of corporate office in locating attractive firms to acquire

– Provide financial resources to business units on favorable terms
  reflecting the corporation’s overall ability to raise funds

– Provide high quality review and coaching for units

– Provide a basis for developing strategic goals and
  reward/evaluation systems
  UD – Portfolio MNGT Cont.
Risks of the BCG Matrix
– Compares SBUs on only two dimensions

– Mechanical Process

– Views each SBU as a stand alone entity

– Reliance on strict rules regarding resource allocation across
  SBUs can be detrimental to a firm’s long-term viability

– Imagery of the BCG matrix can lead to some troublesome and
  overly simplistic prescriptions.
   Mergers and Acquisitions
M & A activity in the U.S. increased in
recent years for 3 primary reasons:
1. Weak economy

2. Weak dollar

3. More governance regulations
              M & A Cont.
Motives for M & A Activity
– Speed

– Access to resources

– Expand product and service offerings

– Synergy

– Force other firms to merge

– Enter new markets or market segments
             M & A Cont.
Potential drawbacks of M & A activities
– Take over premium is very high

– Realized advantages are easily duplicated by
  competitors

– Management ego

– Cultural issues
       Managerial Motives
Growth for growth’s sake

Egotism

Antitakeover tactics
– Greenmail
– Golden parachute
– Poison pills
        Discussion Objectives
1. How corporations can use related diversification to
   achieve synergistic benefits through economies of
   scope and market power.

2. How corporations can use unrelated diversification
   to attain synergistic benefits

3. The various means of engaging in diversification

4. Managerial behaviors that can erode the creation of
   value.

				
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posted:4/11/2012
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