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Document Sample
Chapter
6
Corporate-Level Strategy:
Creating Value through
Diversification
A Diversified Company has 2 levels of strategy
A Diversified Company has 2 levels of strategy
Business-Level Strategy (Competitive Strategy)
Corporate-Level Strategy (Company-wide Strategy)
A Diversified Company has 2 levels of strategy
Business-Level Strategy (Competitive Strategy)
How to create competitive advantage in each business in
which the company competes
A Diversified Company has 2 levels of strategy
Business-Level Strategy (Competitive Strategy)
How to create competitive advantage in each business in
which the company competes
- low cost - focused low cost
- differentiation - focused differentiation
- integrated low cost/differentiation
A Diversified Company has 2 levels of strategy
Business-Level Strategy (Competitive Strategy)
How to create competitive advantage in each business in
which the company competes
- low cost - focused low cost
- differentiation - focused differentiation
- integrated low cost/differentiation
Corporate-Level Strategy (Company-wide Strategy)
How to create value for the corporation as a whole
Corporate Strategy concerns 2 key questions:
Corporate Strategy concerns 2 key questions:
What businesses should the corporation be in?
Corporate Strategy concerns 2 key questions:
What businesses should the corporation be in?
How should the corporate office manage the
array of business units?
Corporate Strategy concerns 2 key questions:
What businesses should the corporation be in?
How should the corporate office manage the
array of business units?
Corporate Strategy is what makes the corporate whole
add up to more than the sum of it business unit parts
Making Diversification Work
Diversification initiatives must create value for
shareholders
Diversification should create synergy
Business Business
1 2
Synergy
Related diversification (horizontal
relationships)
Sharing tangible resources
Sharing intangible resources
Manufacturing Specialized Patents,
facilities skills copyrights, etc.
Production Distribution Favorable
facilities channels reputation
Business Business
1 2
Synergy
Unrelated diversification (hierarchical
relationships)
Value creation derives from corporate office
Leveraging support activities
Business
Human Firm
2
resource mgmt infrastructure
Technology Information
Procurement
development systems
Business
1
Related Diversification
Related Diversification: Economies of
Scope and Revenue Enhancement
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
Existing manufacturing facilities
Three Criteria of Core Competencies
Three criteria (of core competencies) that
Superior lead to the creation of value and synergy
Customer
value
• Core competencies must enhance
competitive advantage(s) by creating
superior customer value
• Develop strengths relative to
competitors
• Build on skills and innovations
• Appeal to customers
Three Criteria of Core Competencies
Three criteria (of core competencies) that
Superior lead to the creation of value and synergy
Customer
value
• Different businesses in the firm must
Businesses be similar in at least one important
similar in way way related to the core competence
related to core
competency • Not essential that products or
services themselves be similar
• Is essential that one or more
elements in the value chain
require similar essential skills
• Brand image is an example
Three Criteria of Core Competencies
Three criteria (of core competencies) that
Superior lead to the creation of value and synergy
Customer
value
• Core competencies must be difficult
Businesses for competitors to imitate or find
similar in way substitutes for
related to core
competency • Easily imitated or replicated core
competencies are not a sound
basis for sustainable advantages
Difficult to
imitate or find • Specialized technical skills
substitutes for acquired only in company work
experience are an example
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 can provide two payoffs
Cost savings
Revenue enhancements
Cost Savings through Sharing Activities
Most common type of synergy
Savings obtained through
Eliminating duplicate jobs
Eliminating duplicate facilities
Eliminating related expenses
Savings may be offset by
Greater costs of coordinating shared activities
Costs of compromising design or performance of a shared
activity
Enhancing Revenue through Sharing
Activities
Acquiring firm and its target may achieve a
higher level of sales growth together than
either could have achieved on its own
Combined distribution channels can escalate
sales of the acquiring company’s products
Enhanced effectiveness of differentiation
strategies
Related Diversification: Market Power
Two principal means to achieve synergy
through market power
Pooled negotiating power
Vertical integration
Government regulations may restrict this
power
Pooled Negotiating Power
Similar businesses
Bargaining working together can
Bargaining Bargaining have stronger
power
power power
bargaining position
relative to
Business Business
1 2 Suppliers
Customers
Competitors
Vertical Integration
Benefits
Dependency Secure source of supply of
• Suppliers raw materials
• Customers
Secure distribution channels
Business
2 Protection and control over
Dependency assets and services
Access to new business
Dependency opportunities and
• Suppliers technologies
• Customers
Simplified procurement and
Business
1 administrative procedures
Vertical Integration
Risks
Costs and expenses
associated with increased
overhead and capital
Business expenditures
2
Dependency
Loss of flexibility resulting
from inability to respond
quickly to changes in the
external environment
Problems associated with
Business unbalanced’ capacities or
1 unfilled demand along the
value chain
Additional administrative
costs
Vertical Integration
In making decisions associated with vertical integration,
four issues should be considered
1. Are we satisfied with our present suppliers and
distributors.
2. Activities in the industry value chain that are a viable
source of future profits?
3. Is demand stable?
4. How high is the proportion of additional production
capacity actually absorbed by existing products or by
the prospects of new and similar products?
Analyzing Vertical Integration: The
Transaction Cost Perspective
Negotiating
Search costs
costs
Market
transaction Costs of
Enforcement
written
costs
contract
Monitoring
costs
Unrelated Diversification
Unrelated Diversification: Financial
Synergies and Parenting
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 resources practices
Financial controls
Corporate Parenting
Parenting—creating value
Corporate
within business units
office Experience of the corporate
office
Support of the corporate
• Plans
• Budgets office
• Procurement
• Legal functions
• Financial functions
• Human resource management
Business Business Business
unit unit unit
Corporate Restructuring
Corporate Find poorly performing
office firms
With unrealized potential
• Sell off parts On threshold of significant
• Reduce payroll
positive change
• Change strategies
• Change management
• Infuse new technologies
• Reduce unnecessary expenses
Business
Business Business
Business Business
Business
unit
unit unit
unit unit
unit
Corporate 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
Portfolio Management
Key
Each circle
represents one of
the firm’s
business units
Size of circle
represents the
relative size of the
business unit in
terms of revenue
Portfolio Management
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
Portfolio Management
Creation of synergies and shareholder value
by portfolio management and the corporate
office
• 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
Means to Achieve
Diversification
Acquisitions or mergers
Pooling resources of other companies with a firm’s
own resource base
Joint venture
strategic alliance
Internal development
New products
New markets
New technology
Mergers and Acquisitions
Value Created Value Destroyed
Deal Year Since Combination Since Combination
AOL/Time Warner 2001 _____ $148 billion
Vodafone/Mannesmann 2000 _____ $299 billion
Pfizer/Warner-Lambert 2000 _____ $78 billion
Glaxo/SmithKline 2000 _____ $40 billion
Chase/J. P. Morgan 2000 _____ $26 billion
Exxon/Mobil 1999 $ 8 billion _____
SBC/Ameritech 1999 _____ $68 billion
WorldCom/MCI 1998 _____ $94 billion
Travelers/Citicorp 1998 $109 billion _____
Daimler/Chrysler 1991 _____ $36 billion
As of July 1, 2002.
Source: K. H. Hammonds, “The Numbers Don’t Lie,” Fast Company, September 2002, p. 80.
Exhibit 6.5 Ten Biggest Mergers and Acquisitions of All Time and Their Effect on Shareholder Wealth
Strategic Alliances and Joint Ventures
Entering new Introduce successful product
markets
or service into a new market
Lacks requisite marketing
expertise
Doesn’t understand customer
needs
Doesn’t know how to promote
the product
Doesn’t have access to proper
distribution channels
Strategic Alliances and Joint Ventures
Entering new Join other firms to reduce
markets
manufacturing (or other)
costs in the value chain
Reducing Pool capital
costs in value
chain Pool value-creating activities
Pool facilities
Economies of scale
Strategic Alliances and Joint Ventures
Entering new Develop or diffuse new
markets
technologies
Use expertise of two or more
Reducing companies
costs in value Develop products
chain technologically beyond the
capability of the companies
Developing
acting independently
diffusing new
technology
Unmet Expectations: Strategic Alliances
and Joint Ventures
Improper partner
Each partner must bring desired complementary
strengths to partnership
Strengths contributed by each should be unique
Partners must be compatible
Partners must trust one another
Real Options Analysis
Stock options (financial assets)
Real options ( real assets or physical things)
Investments can be staged
Strategic decision-makers have “tollgates”
Increased knowledge about outcomes at the time
of the next investment decision
Managerial Motives Can Erode Value
Creation
Growth for growth’s sake
Egotism
Antitakeover tactics
Greenmail
Golden parachute
Poison pills
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